# How is a mortgage prepayment penalty calculated in Canada?

> For fixed-rate mortgages, the penalty is the GREATER of 3 months' interest OR the Interest Rate Differential (IRD). Variable-rate mortgages typically charge only 3 months' interest.

Category: Regulatory
Last verified: 2026-04-19
Source: https://ratellow.com/faqs/regulatory/prepayment-penalty-calculation-canada

## Answer
Canadian mortgage prepayment penalties differ by rate type. For fixed-rate mortgages: the penalty is the GREATER of (1) 3 months' interest on the outstanding balance, OR (2) the Interest Rate Differential (IRD). The IRD is calculated as: (your contract rate − lender's current rate for a term matching your remaining term) × outstanding balance × remaining months ÷ 12. Because lenders use different comparison rates (some use posted rates, others use discounted rates), IRD calculations vary significantly between lenders — chartered banks using posted rates typically charge much higher IRD penalties than monoline lenders using discounted comparison rates. For a $450,000 mortgage at 5.2% with 3 years remaining, refinancing to 3.9% could trigger an IRD of $17,000–$25,000 depending on the lender. For variable-rate mortgages: the penalty is almost always just 3 months' interest, making variable-rate mortgages much cheaper to break. Always request a formal payout statement from your lender before deciding to break your mortgage — penalties must be disclosed in writing under OSFI B-20 guidelines.

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## Related guide
- https://ratellow.com/guides/mortgage-prepayment-privileges

## Sources
- FCAC Breaking Your Mortgage — https://www.canada.ca/en/financial-consumer-agency/services/mortgages/breaking-mortgage.html
- B-20 Mortgage Underwriting Guidelines — https://www.osfi-bsif.gc.ca/en/guidance/guidance-library/residential-mortgage-underwriting-practices-procedures-guideline-2017