Breaking Your Mortgage Early; Penalties

Most mortgages in Canada are set up with a specific term, often two to five years. If you decide to break your mortgage before the end of that term, there is usually a penalty charged by the lender. Understanding how these penalties work is important if you are thinking about selling your home, refinancing, or making changes to your mortgage.

The penalty is essentially a fee the lender charges for ending the mortgage agreement early. The amount can vary depending on the type of mortgage you have and the terms of your agreement.

For variable rate mortgages, the penalty is typically equal to three months of interest on the remaining mortgage balance. This is usually the simpler and more predictable type of penalty.

For fixed rate mortgages, the penalty can sometimes be higher. In many cases, lenders calculate the penalty using what is called the Interest Rate Differential, often referred to as IRD. This calculation compares your current interest rate to the rate the lender could offer today for a similar term, and the difference can result in a larger penalty.

If you are considering breaking your mortgage early, it is always a good idea to review the potential penalty before making a decision. In some situations, refinancing or restructuring your mortgage can still make financial sense even after factoring in the penalty.

Before making any changes to your mortgage, speaking with a mortgage professional can help you understand the costs involved and explore the options available to you.