How the penalty is calculated
On a variable rate mortgage, the penalty is usually three months of interest. On a fixed rate, it is the greater of three months interest or the interest rate differential, and the differential on a big-bank fixed mortgage can be brutal because it is measured against their posted rates, not your actual rate. Two mortgages at the same rate can carry penalties thousands of dollars apart.
Get your real penalty number, not an estimate
Online penalty calculators are rough. Your lender will give you an exact payout statement, valid for a set number of days, that includes the penalty and the discharge amount. That is the only number worth making a decision on. Ask for it before you start shopping for a replacement.
- Request a written payout statement from your current lender
- Note the expiry date on the statement
- Add legal, discharge, and appraisal fees to the penalty for true cost
Compare savings over the remaining term, not forever
If a new mortgage saves you four hundred dollars a month but your old term had fourteen months left, the honest comparison is fourteen months of savings, around fifty-six hundred dollars, against the penalty and fees. Savings beyond the old term's end date do not belong in the comparison because the old mortgage would have ended anyway.
Situations where breaking often wins
A divorce or separation that requires a buyout, a move that will not fit the porting window, a debt consolidation that replaces high-interest balances, or a rate gap large enough to recover the penalty within the remaining term. In each case the penalty is a cost of solving a bigger problem, not just a fee.
Ways to shrink the penalty
Most mortgages allow annual prepayment privileges of ten to twenty percent. Making that lump sum payment before the payout reduces the balance the penalty is calculated on. Some lenders also waive or reduce penalties if you port and increase. These levers are worth thousands and most borrowers never use them.
Frequently asked questions
- What is the interest rate differential?
- A penalty formula that charges you the interest the lender loses when you break a fixed mortgage early. Because big banks calculate it against posted rates, it is often much larger than three months interest.
- Is the penalty tax deductible?
- On a rental or business property, generally yes as a financing cost. On your principal residence, no. Confirm with your accountant for your situation.
- Can I negotiate the penalty?
- Rarely directly, but staying with the same lender on a new mortgage, porting, or timing the break near maturity can reduce it substantially.