*Disclaimer: Please note that the calculation results are estimates based on our most up-to-date information sourced from lenders’ publicly stated methodology and first-hand accounts. This information is subject to change and does not include special offers or any discharges, registration, reinvestment or transfer fees. For more details, contact your lender directly.
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There are two main ways mortgage penalties are calculated, and they depend on the type of mortgage you have. The penalty to break a variable-rate mortgage mid-term is simply three months-worth of interest charges. However, it’s more complicated with a fixed-rate mortgage; in this case, a formula called the Interest Rate Differential is applied, which determines the difference between the existing interest rate, and a similar posted rate offered by the lender. It determines how much interest you would have paid if your lender gave you your mortgage at today’s rates, for the remainder of time left in your term.
Unless your mortgage product comes with the ability to pay off your mortgage early, either via a lump sum or through accelerated payments , you’ll incur a penalty if you pay it off before your term ends, as this is essentially breaking the mortgage. In this case, you must pay three months’ worth of interest if your mortgage has a variable term, or the interest rate differential if it has a fixed term.
If you are breaking a variable mortgage term, you’ll need to pay three-months’ worth of interest as a penalty. The amount you’ll pay depends on your interest rate. Using the calculator above as an example, let’s assume you have a $500,000 mortgage with a variable term and a rate of 5.95%. Your resulting mortgage penalty will be $4,463.
Jamie David , Sr. Director of Marketing and Mortgages
When breaking your mortgage contract early, usually because of a refinance or the sale of your home, you will unfortunately have to pay your lender a penalty called a prepayment penalty. The amount you pay will depend on a variety of factors including the day you signed your original mortgage contract, the term of that contract and your existing mortgage balance, rate type and mortgage rate.
One of the biggest drivers of your mortgage penalty is whether you have a variable or fixed mortgage rate. Fixed rate holders pay the greater of interest rate differential or three months of interest, while variable rate holders pay just three months of interest.
Ratehub.ca’s mortgage penalty calculator captures your required inputs, determines your prepayment penalty and shows you the corresponding calculations for the curious mathematicians out there. For a more detailed article on determining your penalty, please visit our costs of refinance page.
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