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Direct answer: In Canada, breaking a variable-rate mortgage incurs a penalty equal to 3 months of interest. Breaking a fixed-rate mortgage costs the greater of 3 months of interest or the Interest Rate Differential (IRD). For Big-5 chartered banks, IRD penalties use posted rate discount clawbacks that often cost 2× to 4× more than fair monoline lenders.
Remaining mortgage balance
Your existing interest rate
e.g. 24 months left on 5-yr term
Lender posted rate at start of term (e.g. 6.99%)
Lender posted rate for matching remaining term (e.g. 2-yr posted)
Calculate break-even timeline and net savings from breaking early.
e.g. 4.19% from a new lender or current market promo
Method used: Big-5 Bank Posted Rate IRD (Discount Clawback): Balance × 1.2% × (24/12)
You save approximately $488/month in interest at 4.19%.
Breaking early and switching saves you money over the remaining term.
| Scenario | Inputs | Estimated Penalty | Calculation Note |
|---|---|---|---|
| $400,000 Variable Rate Mortgage (6.00%) | 24 months remaining, Variable rate | $6,000 Penalty (3 Months Interest) | Variable penalties are strictly 3 months interest ($400,000 × 6% / 12 × 3). |
| $500,000 Fixed Rate (5.49%) with Monoline Lender | 24 months remaining, Current comparison rate 4.29% | $12,000 Penalty (Standard IRD) | Rate diff of 1.20% over 2 years: $500,000 × 1.20% × 2 = $12,000 (exceeds $6,862 3-mo interest). |
| $500,000 Fixed Rate (5.49%) with Big-5 Bank | 24 months remaining, Original posted 6.99%, Current posted 5.79% | $18,500+ Penalty (Big-Bank Discount Clawback) | Bank discount calculation expands effective rate spread, increasing prepayment penalty. |
1. Variable Rate 3-Month Formula: Calculated as Penalty = Principal × (Annual Rate / 12) × 3. Under FCAC rules, variable mortgages with Canadian federally regulated lenders cannot charge IRD.
2. Standard IRD Formula: Evaluates the difference between your contract interest rate and the current rate for a term matching your remaining duration: IRD = Principal × (Contract Rate - Comparison Rate) × (Remaining Months / 12).
3. Big-Bank Discount Clawback: When borrowers receive a "discount" off the posted rate (e.g. posted 6.99% discounted to 5.49%), major banks subtract that original discount from their current posted comparison rate, artificially expanding the rate spread and multiplying the penalty.
4. Section 10 of Canada's Interest Act: If you have a residential mortgage term exceeding 5 years (such as a 7-year or 10-year term), you have the legal right to prepay the balance in full at any time after the 5th anniversary by paying no more than 3 months interest.
Under Financial Consumer Agency of Canada (FCAC) guidelines, variable-rate mortgages charge 3 months interest. Fixed-rate mortgages charge the greater of 3 months interest or the Interest Rate Differential (IRD). The IRD measures the difference between your contract interest rate and the current rate the lender can lend that money at for the remaining term.
Major Canadian chartered banks (RBC, TD, Scotiabank, BMO, CIBC) use their inflated "posted rates" at contract signing rather than your discounted contract rate to calculate the IRD. When you break early, they claw back your original discount, which can inflate a fixed-rate penalty from $6,000 to over $20,000 on a typical Canadian mortgage.
You can avoid penalties if you port your mortgage to a new property, have the buyer assume your mortgage (if assumable), make prepayment lump sums up to your annual privilege limit (typically 10% to 20%) before requesting payout figures, or wait until renewal (within 30 to 120 days of maturity depending on the lender).
Yes. Under Section 10 of the Canada Interest Act, individual borrowers on a fixed mortgage term longer than 5 years can break the mortgage after the 5th year by paying a maximum penalty of only 3 months interest, regardless of lender IRD formulas.
Breaking a mortgage is financially advantageous when the total interest savings from refinancing into a lower rate over your remaining term exceed the prepayment penalty plus administrative/legal discharge fees. Our calculator displays your break-even month count and net dollar savings.
Direct answer
In Canada, breaking a variable mortgage costs 3 months of interest. Breaking a fixed mortgage costs the greater of 3 months of interest or the Interest Rate Differential (IRD). Big-5 banks use posted rate discount clawbacks that increase penalties significantly.
Calculations, interest rates, and tax threshold benchmarks displayed across UseCOS tools are updated as of August 2026 based on official publications from the Bank of Canada, Canada Revenue Agency (CRA), OSFI, and provincial regulatory bodies.
UseCOS provides transparent educational estimates and math comparisons for personal planning. Tools do not guarantee lender approval, tax compliance, or specific mortgage terms.
For binding mortgage rate commitments, loan contracts, or official tax filings, please consult a licensed Canadian mortgage broker, CPA, or official lender representative.