Prepayment Penalty
The fee charged when you pay off or break a mortgage early — the greater of three months' interest or the IRD calculation for fixed-rate mortgages.
A prepayment penalty is the fee your lender charges when you pay off or break your mortgage before the term ends. For variable-rate mortgages, the penalty is simply three months of interest at your current rate. For fixed-rate mortgages, the penalty is the greater of three months' interest or the Interest Rate Differential (IRD). You can also trigger prepayment penalties by prepaying more than your annual allowance (typically 15–20% of the original mortgage balance). Most mortgages allow annual prepayments and lump-sum payments within defined limits without penalty.
Related Terms
The larger of two penalty calculations applied when breaking a fixed-rate mortgage early at the Big 5 banks — often the difference between your posted rate and the lender's current posted rate.
The annual allowance for paying down extra principal without triggering a penalty — typically 15%, 20%, or 25% of the original mortgage balance.
A mortgage where the interest rate is locked for the full term, keeping your monthly payment constant regardless of Bank of Canada decisions.
Related Guides
Related FAQs
- How do prepayment privileges work, and what are the limits?
- How can homeowners use lump-sum prepayments effectively at renewal?
- What are the prepayment options available with Sagen-insured mortgages?
- How does OSFI's B-20 guideline affect mortgage underwriting and prepayment strategies?
- How is a mortgage prepayment penalty calculated in Canada?