Mortgage Penalties in Canada: Three Months’ Interest vs. IRD

When a mortgage penalty may apply

A prepayment charge may apply when you break a closed mortgage, transfer it before maturity, repay more than the permitted amount, refinance or sell without using an available portability feature. Open mortgages generally allow repayment without a prepayment penalty, but usually have different pricing.

Three months’ interest

This calculation generally estimates three months of interest on the amount being prepaid using the rate specified under the lender’s method. The exact calculation may differ, so request a written payout statement instead of relying only on a general online estimate.

Interest rate differential (IRD)

An IRD estimates the lender’s interest loss by comparing your mortgage rate with a comparison rate for the remaining term. Lenders may use posted rates, discounted rates or other contract-defined methods. Small methodology differences can create a large change in the penalty.

What to request from the lender

• The current penalty amount and how long the quote is valid
• Whether the calculation uses three months’ interest or IRD
• The outstanding balance and rate used
• The comparison rate and remaining term used for IRD
• Any discharge, administration, appraisal or reinvestment fees
• Portability, blend-and-extend or prepayment options that may reduce the cost

Compare the penalty with the expected benefit

Do not break a mortgage solely because another rate is lower. Add the penalty and all transaction costs, then compare the expected interest and payment difference over the time you are likely to keep the new mortgage. Also consider whether the new contract improves flexibility or simply restarts another restrictive term.