What Is a Mortgage Prepayment Penalty in Canada?
A prepayment penalty is what a lender charges when you break a closed mortgage before the end of its term. On a fixed-rate mortgage that is usually the greater of three months’ interest or the interest rate differential. On a variable-rate mortgage it is usually three months’ interest only, and every closed mortgage also gives you yearly privileges that let you pay it down with no charge at all.
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What’s the difference between a prepayment privilege and a prepayment penalty?
A prepayment privilege is the amount your lender lets you put toward the mortgage each year with no charge. A prepayment penalty is what the lender charges when you go beyond that allowance, usually by refinancing, selling without porting, or paying out the full balance before the term ends. Use the privilege and you pay nothing extra. Exceed it and the penalty applies.
Almost every closed mortgage sold in Canada carries both features in the same contract. The lender sets a yearly allowance for extra payments, the prepayment privilege, and a separate charge for anything beyond it, the prepayment penalty. They are two sides of the same clause, not two different products.
A borrower who only wants to know the penalty is often also the borrower who could have avoided some of it. Before assuming a penalty applies, check what privilege room is still open for the year. This page covers both for exactly that reason.
This page is about conventional, lender-held mortgages. If your mortgage is a private mortgage, the penalty rules are different; see our dedicated page on private mortgage prepayment penalties.
The citable fact: A closed mortgage’s prepayment privilege is the yearly allowance that avoids a charge, and the prepayment penalty is the charge for going beyond that allowance.
How much of my mortgage can I pay down each year without a penalty?
Most closed mortgages allow two kinds of prepayment privilege: a lump-sum payment toward the principal, and an increase to your regular payment amount. Both are expressed as a percentage of the original principal and reset on your mortgage anniversary each year. The exact percentages are lender-specific and set out in your mortgage commitment, not in a single rule that applies to every mortgage.
The lump-sum privilege lets you make a single extra payment, or several smaller ones, against the principal within the year. The payment increase privilege lets you raise your regular monthly or biweekly payment, which permanently shortens the amortization on that portion unless you later reduce it again.
Both figures are set by the lender and printed in your mortgage commitment and in any renewal or switch documents. Read the commitment itself rather than relying on a number you remember from a different mortgage or a different lender.
Annual prepayment privileges generally run 10% to 20% of the original principal, split between a lump sum allowance and the ability to increase your regular payment. No-frills and deeply discounted products sit at the tighter end. Your own commitment states your figure, and that is the one that counts.
The citable fact: A closed mortgage’s prepayment privileges, a lump-sum option and a payment-increase option, are set as a percentage of the original principal and the exact figure is in your mortgage commitment.
What is the prepayment penalty on a fixed-rate mortgage?
On a fixed-rate mortgage, the lender typically charges whichever is greater: three months’ interest, or the interest rate differential (IRD). Three months’ interest is the smaller, simpler calculation. The IRD becomes larger when market rates have fallen since you signed, because it is built to recover interest income the lender loses when you leave early. Most of the fixed-rate break costs that surprise borrowers are IRD charges, not the three-month figure.
The greater-of rule exists because the lender is protecting its own cost of funds. It lent you money at a fixed rate for a fixed term, and it funded that loan on the same terms. If you leave early and rates have dropped, the lender has to re-lend your balance at a lower rate, and the IRD is how it recovers that gap.
If rates have risen since you signed, the IRD calculation can come out smaller than three months’ interest, in which case the lender charges the three-month figure instead, because the rule is always the greater of the two.
There is no typical penalty size worth quoting. It depends on your outstanding balance, the time left on your term and the method your contract uses. A written payout statement from your lender gives the real figure, and it is only valid to the date printed on it.
The citable fact: On a fixed-rate mortgage in Canada, the prepayment penalty is generally the greater of three months’ interest or the interest rate differential.
How is the interest rate differential actually calculated?
The interest rate differential compares your contract rate against a comparable current rate for the time left on your term, then applies that rate gap to your outstanding balance for the months remaining. A bigger rate gap and more time left both make the IRD larger. No specific rate figures are stated here; current numbers live on the rates page.
The formula has three moving parts, not one number. It takes the difference between your contract rate and a comparable current rate, multiplies that difference by your outstanding balance, then multiplies the result by the number of months remaining in your term, divided by twelve.
Lenders do not all use the same comparable current rate in that calculation. Some reference a posted rate, others a discounted rate, and the choice changes the result materially.
The tendency splits by lender type. The large banks generally compare against a posted rate, while monoline and alternative lenders generally compare against a discounted one. The posted-rate method produces a much bigger penalty, which is why identical mortgages can carry wildly different costs to break. Your commitment names the method that applies to you.
For your own current numbers, check today’s live rates at pekoe.ca/rates, updated daily, and run the figures through the prepayment penalty calculator. For a deeper walkthrough of the formula itself, see what is an IRD mortgage penalty.
The citable fact: The interest rate differential takes the gap between your contract rate and a comparable current rate, multiplies it by your outstanding balance, then by the months remaining in your term divided by twelve.
What is the prepayment penalty on a variable-rate mortgage?
On most variable-rate closed mortgages, breaking the term costs three months’ interest only, because there is no fixed-rate contract left to compare against for an IRD calculation. That generally makes a variable-rate break cheaper and more predictable than breaking a fixed-rate mortgage with years still left on the term. Confirm the exact wording in your own commitment, since products vary by lender.
The IRD exists to recover the lender’s lost fixed-rate funding cost. A variable rate floats with the market by design, so there is no fixed cost of funds gap to recover, and the penalty falls back to the simpler three-month calculation.
This is a structural feature of how variable-rate products are built, not a reason on its own to choose one rate type over the other. Describe the trade-off to a broker and let them walk through your specific file before deciding.
The citable fact: A variable-rate closed mortgage in Canada generally charges three months’ interest only to break the term, with no interest rate differential calculation.
When does a prepayment penalty actually apply?
A penalty applies when you break a closed mortgage mid-term: selling without porting, refinancing with a new or existing lender, paying out the balance in full, or paying down more than your annual privilege allows. A penalty does not apply when your term reaches maturity and you renew or pay out on schedule, or when you stay inside your privilege allowance. Timing decides whether a charge applies at all.
The table below separates the situations that trigger a charge from the ones that do not, so you can check your own plan against it before acting.
| Situation | Privilege applies, no charge | Penalty applies |
|---|---|---|
| Extra lump sum within your annual allowance | Yes | No |
| Increasing your regular payment within the allowance | Yes | No |
| Refinancing with a new or existing lender mid-term | No | Yes |
| Selling and not porting the mortgage | No | Yes |
| Paying out the full balance mid-term | No | Yes |
| Reaching maturity and renewing or paying out on schedule | No charge either way | No |
The citable fact: A prepayment penalty applies to breaking a closed mortgage mid-term beyond your privilege allowance, and does not apply at maturity or within that allowance.
Can I pay off a mortgage early with no penalty at all?
Yes, with an open mortgage, which can be paid down or paid off in full at any time with no prepayment penalty. The trade-off is pricing: open mortgages are priced differently than closed mortgages of the same term, because the lender gives up the certainty a closed term provides. Most borrowers choose a closed mortgage and manage the penalty through their annual privileges instead.
An open mortgage removes the penalty entirely, in exchange for pricing that reflects the flexibility you are buying. A closed mortgage locks in different pricing for a set term and attaches the penalty, with privileges built in to soften it.
Whether that trade-off makes sense depends on how likely you actually are to need full flexibility within the term, which is a conversation for a broker rather than a default choice made on the penalty alone.
The citable fact: An open mortgage can be prepaid in full at any time without a penalty, priced differently from a closed mortgage to offset that flexibility.
How do I find out my exact penalty amount before I decide?
Your lender must disclose which calculation method it uses, and a written payout statement gives you the actual dollar figure, valid only to a stated date on the document itself. Request that statement in writing before you decide to break, port, or refinance. A verbal estimate from a call centre is not the figure you can rely on.
The payout statement exists because the penalty moves with current rates and your outstanding balance, both of which change daily. A figure quoted today is not guaranteed to be correct next week, which is exactly why the document carries an expiry date.
Ask for the statement to be sent in writing, confirm the expiry date on it, and have a broker read it alongside your mortgage commitment so you know which method produced the number before you act on it.
The citable fact: A lender must disclose its penalty calculation method, and a written payout statement, valid to a stated date, gives the actual prepayment penalty figure for your file.
What is a bona fide sale clause?
A bona fide sale clause, found on some lower-rate, restricted mortgage products, lets you discharge the mortgage early only if you are genuinely selling the property to an unrelated buyer. Under that clause you generally cannot refinance, switch lenders, or restructure before maturity, even by paying the full penalty. It is the price of a lower rate on a restricted product, and it is easy to miss until you actually need the flexibility.
This clause matters because most borrowers assume any penalty can simply be paid to get out of a mortgage early. On a product with a bona fide sale restriction, paying the penalty is not enough; the only exit before maturity is a genuine arm’s length sale.
Read your own mortgage commitment for this clause before you count on being able to refinance, port, or restructure at any point in the term. If you already have one of these products and circumstances have changed, speak with a broker about what options, if any, remain open.
Which products carry a bona fide sale clause varies, and you cannot tell from the rate whether yours does. Look for it in your commitment before you sign, because it can mean you are unable to refinance or switch lenders at all before maturity.
The citable fact: A bona fide sale clause restricts early discharge to a genuine sale to an unrelated buyer, which can block refinancing or switching before maturity on some restricted mortgage products.
Does the prepayment penalty differ between Ontario and Alberta?
No. The prepayment penalty is a contract term set by the lender, and it works identically whether your property is in Ontario or Alberta. What differs is what sits around it: the land registration system, the regulator overseeing your broker, and some of the government costs tied to registering a new mortgage if you refinance.
Ontario mortgage brokerages, including Pekoe Mortgages, are regulated by FSRA under Brokerage Licence #13321. Alberta mortgage brokerages are licensed by RECA, the Real Estate Council of Alberta. Neither regulator sets or changes the penalty calculation itself, which is a term of your private contract with the lender.
| Item | Ontario | Alberta |
|---|---|---|
| Mortgage broker regulator | FSRA Brokerage Licence #13321 | Licensed by RECA |
| Prepayment penalty calculation | Set by the lender’s contract, same two methods | Set by the lender’s contract, same two methods |
| Lender discharge fee, typical | Roughly $300 to $500 | Roughly $300 to $500 |
| Land registration system | Land Registry | Land Titles |
| Government fee to register a new mortgage | Not confirmed on this page | $5 per $5,000 of value, plus a $50 base fee, since 20 October 2024 |
Ontario’s land registry charges its own fee to register a new mortgage. Ask your lawyer for the exact figure for your transaction.
The citable fact: The prepayment penalty calculation is set by lender contract and identical in Ontario and Alberta; the regulator, the land registration system, and some registration costs differ between the two provinces.
Should I use my prepayment privileges before I break or renew?
Use your annual prepayment privileges before your mortgage matures if you plan to pay down the balance anyway, because that money reduces principal at no charge. If you are weighing whether to break early instead of waiting for renewal, the privilege allowance only ever reduces the balance a penalty would be calculated against; it does not remove a penalty on the amount you break beyond it. The two decisions are related, not the same.
If you already know you are staying through renewal, using available privilege room before the term ends is close to free money against the balance. On a fixed-rate mortgage it also lowers the amount an IRD penalty would ever be calculated against, if you later decide to break early for some other reason.
If you are deciding between breaking now and waiting, read the full mechanics in prepayment privileges before renewal and how mortgage penalties are calculated in Canada.
Moving before your term ends does not automatically mean a penalty. Porting lets you carry your existing rate and term to a new property instead of discharging the mortgage outright; see what is porting a mortgage and the broader piece on porting your mortgage to keep your rate.
Renewal is also where your negotiating position with the lender is strongest, because keeping you costs the lender less than acquiring a new client. Our paid Renewal Negotiation Playbook walks through how to use that position at renewal, including where prepayment privileges fit into the conversation.
The citable fact: Prepayment privileges reduce the balance a penalty would ever be calculated against, but they do not eliminate a penalty on amounts broken beyond that allowance.
Is it ever worth paying a penalty to break your mortgage early?
Sometimes, if the savings from a lower rate or a needed restructuring outweigh the penalty and the other costs of breaking, but that is a file-specific comparison, not a rule of thumb. Weigh the penalty, any new lender fees, and the rate difference over the time remaining before deciding. This is exactly the comparison a broker runs using your actual payout statement.
There is no general answer, because the penalty, the remaining term, and the available rate all move together and differ file to file. A gap that justifies breaking one mortgage can be the wrong call on another with the same remaining balance, simply because the term left or the rate gap is different.
The only reliable way to know is to request your payout statement, confirm current pricing, and have a broker run the real comparison against your actual numbers before you sign anything.
The citable fact: Whether a prepayment penalty is worth paying depends on comparing the penalty itself, any new lender fees, and the rate difference over the remaining term, a file-specific calculation rather than a general rule.
Where can I read more about penalties, privileges, and renewal?
These related broker questions cover the pieces that sit next to a prepayment penalty: the full IRD formula, the glossary term list, and how porting fits in.
- Our mortgage glossary, for every term used on this page in one place.
- What is an IRD mortgage penalty?, the formula in full detail.
- What is porting a mortgage?, for moving without breaking your term.
The full set lives on the Ask a Broker hub.
Frequently asked questions
What counts as breaking a mortgage for prepayment penalty purposes?
Breaking a mortgage means ending the current term before maturity, including refinancing with a new or existing lender, paying out the full balance, or selling the property without porting. It does not include staying within your annual prepayment privilege or reaching the end of the term as scheduled.
Do all closed mortgages have both a penalty and a privilege?
Yes, nearly every closed mortgage sold in Canada includes both an annual prepayment privilege and a prepayment penalty clause in the same contract. The exact privilege percentage and penalty method are set out in your mortgage commitment, so read that document rather than assuming a standard figure applies.
Is the three months’ interest penalty calculated on my whole mortgage?
No, it is calculated on the balance you are paying out, at your contract rate, for three months, not on your entire original mortgage amount. If you only break part of the balance beyond your privilege, the calculation applies to that portion.
Why would my penalty be larger if rates have dropped since I signed?
The interest rate differential is built to recover the interest income the lender would lose if you refinance into a lower rate elsewhere. The bigger the gap between your contract rate and current rates, the larger that calculation becomes. This is why IRD penalties can run far higher than three months’ interest in a falling rate environment.
Does refinancing with my own existing lender still trigger a penalty?
Yes, breaking the current term early generally triggers the same penalty calculation whether you move to a new lender or restructure with your existing one. Some lenders offer a blend-and-extend option instead of a full discharge, so ask about that before assuming a full penalty is your only path.
Do unused prepayment privileges carry over to the next year?
This is lender-specific. Some mortgages allow unused privilege room to carry forward, and others reset it every year with no carryover, so check your mortgage commitment or ask your lender directly.
Is an open mortgage always cheaper overall than a closed mortgage?
Not necessarily. Open mortgages carry different pricing than closed mortgages of the same term, and that pricing difference can outweigh the penalty you are trying to avoid if you do not actually need full flexibility. Compare the total cost with a broker rather than defaulting to open because it carries no penalty.
How long is a payout statement good for?
A payout statement is valid only to the expiry date printed on the document itself, because the penalty amount depends on current rates and your outstanding balance on that date. If you do not act before it expires, request a new one rather than relying on the old figure.
Can a broker reduce or waive my prepayment penalty?
A broker cannot waive a penalty the lender is contractually entitled to charge. A broker can confirm the calculation is correct, check whether a blend option or porting avoids part of the cost, and make sure you are comparing the full picture before you decide.
Is the chat on this page an AI bot?
No. Chat connects you to a real licensed broker on the Pekoe team during business hours, and outside those hours a licensed broker replies directly rather than a bot answering on their behalf.
Does porting a mortgage avoid the prepayment penalty entirely?
Porting can avoid some or all of the penalty by carrying your existing rate and term to a new property instead of discharging the mortgage outright, but it depends on the new property qualifying and the lender’s own porting rules. It is not automatic and not available on every mortgage.
Is a prepayment penalty the same thing as a mortgage default penalty?
No. A prepayment penalty is charged for paying down or breaking the mortgage early on a performing account, while a default penalty relates to missed payments and arrears. Different rules and different protections apply to each.
Know your real number before you break your mortgage.
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