Variable rate: usually simple
Breaking a closed variable mortgage normally costs three months interest on the outstanding balance. On a $600,000 balance that is a manageable, predictable figure, which is one reason variable holders refinance more freely.
Fixed rate: the interest rate differential
On a fixed mortgage the penalty is the greater of three months interest or the IRD - roughly the difference between your rate and the lender's current comparable rate, applied over your remaining term. The trap is that some lenders calculate IRD against their posted rates rather than the discounted rate you actually pay, which inflates the penalty substantially.
Get the payout statement
Never rely on an estimate from an online calculator. Call your lender, request a formal payout statement showing the penalty, the discharge fee, and the per-diem interest, and work from that.
- Exact penalty amount as of a stated date
- Discharge or administration fee
- Any outstanding property tax the lender holds
- Per-diem interest after the quoted date
When breaking still wins
If the interest saved over the remaining term, or the interest saved by consolidating high-rate debt, exceeds the penalty plus closing costs, refinancing pays. Consolidations often clear that bar quickly because the debt being replaced carries far higher rates than any mortgage.
Ways to avoid or reduce it
Ask about blend-and-extend with your current lender, use your annual prepayment privilege first to shrink the balance the penalty is calculated on, or wait for the maturity date and register a short second mortgage to bridge the gap.
Frequently asked questions
- Can the penalty be added to the new mortgage?
- Usually yes, provided the total stays within 80 percent of the appraised value.
- Is there a penalty at renewal?
- No. At maturity you can refinance, switch lenders, or pay the mortgage out with no prepayment charge, which is why renewal is the cheapest window to make changes.