If you break your mortgage prior to maturity, you will pay a penalty.

Author: Corina Murphy Mortgages - Premiere Mortgage Centre | | Categories: First Time Home Buyer Mortgage , Home Equity Loan , Investment Property Mortage , Mortgage Broker , Mortgage Renewal , Second Mortgage

Variable rate mortgages have the simplest calculation.

The penalty to break your mortgage is 3 months simple interest. The lender will either calculate your
penalty on their prime rate or contract rate, which includes your discount.

If your mortgage balance is $500,000 and the prime rate is 3.20% and the lender is basing the penalty on
the prime rate, the penalty is $4,000.00.

(Mortgage Amount x Interest Rate /12 Months) x 3 Months
($500,000 x 3.20% / 12) x 3 = $4,000

If the lender calculates the penalty based on the contractual rate and your rate was 2.40%, then your
penalty would be $3,000.00

(Mortgage Amount x Interest Rate /12 Months) x 3 Months
($500,000 x 2.40% / 12) x 3 = $3,000

Fixed rates are more complex to calculate and penalties can vary widely depending on the lender.

Assuming a fixed interest rate of 3.39% with 3 years remaining, the lender would compare to the current
rate for a 3 year term.

If today’s 3-year fixed rate is 2.05%, the lender would deduct the 2.05% from your existing rate of 3.39%
to determine the differential. In this case, it would be 1.34%. This differential of 1.34% along with your
current mortgage balance and term remaining will determine the penalty.

Mortgage Amount x Interest Differential / 12 months x Months remaining on term = Penalty
$500,000 x 1.24% /12 x 36 months = $ 20,100.00

This is the simplest calculation method for IRD penalties and is usually the most favourable.

Alternatively, the lender may consider the posted rate when you originated your mortgage.
If the posted rate was 4.89% when you took your mortgage, the lender may calculate your penalty based
on 4.89% - 2.05% (the current 3 year rate) for a differential of 2.84%. The penalty then increases to
$ 42,600.00.

(Mortgage Amount x Interest Differential /12 months) x Months remaining on term = Penalty
($500,000 x 2.84% /12) x 36 months = $ 42,600

There are some factors to keep in mind when it comes to penalty calculations such as rate changes and
months remaining on your term which impact the penalty amount. Lenders quote penalties on the date
requested. Unless your lawyer receives a Discharge Statement from the lender, the penalty is subject to

If you are not sure what type of penalty is applicable to you, a Licensed Mortgage Broker can work with
you to help you understand and potentially minimize your penalty.