This guide shows how the two standard penalty formulas work, runs the numbers on a hypothetical $400,000 mortgage using rates posted today, and explains where the five-year rule in the Interest Act fits in.

The short answer

On a closed fixed-rate mortgage, you usually pay the higher of three months’ interest or the interest rate differential (IRD). On a closed variable-rate mortgage, you often pay three months’ interest. The IRD is the one that gets expensive, and it gets more expensive when your lender subtracts the discount you received at signing from today’s posted rate.

The Financial Consumer Agency of Canada (FCAC) describes both methods, and says lenders typically use the IRD when your rate is higher than current rates and your contract is less than five years old. Your agreement decides which rates go into the formula, so the same balance can produce very different penalties at different lenders.

The two penalty formulas

Three months’ interest

This one is simple. Multiply the balance you are paying off by your interest rate and divide by four. RBC publishes this exact method in its prepayment charge example: $100,000 at 9% is $9,000 a year, so three months is $2,250.

On a $400,000 balance at 5.14%, three months’ interest is $5,140.

Interest rate differential

The IRD estimates the interest the lender loses because you leave before the term ends. The basic formula is:

(your rate minus the comparison rate) x balance x months left / 12

Everything depends on the comparison rate. The FCAC lists the options lenders use. The first rate is either the posted rate when you signed or your actual contract rate. The second is either today’s posted rate for a term close to what you have left, or that posted rate minus the discount you were originally given.

Some lenders use the second version. RBC, for example, says its IRD uses its posted rate on the prepayment date for a term similar to your remaining term, less any rate reduction you received. RBC’s worked example uses a 9% mortgage, a 6% posted rate and a 0.5-point discount, so the comparison rate is 5.5%. On $100,000 with 36 months left, that gives (9% minus 5.5%) x $100,000 x 36 / 12 = $10,500, which beats the $2,250 three-month figure.

RBC also says its real calculation uses present value and accounts for your declining balance, which lowers the charge. Treat the simple formula as an upper estimate and ask for the exact figure.

Why your original discount matters so much

Posted rates sit well above the rates most people actually pay. On October 21, 2026, RBC’s posted 5-year fixed closed rate was 6.19%, while its special offer for amortizations of 25 years or less was 5.14%. That is a 1.05-point gap. Its 3-year posted rate was 6.25%, against a 4.99% special offer. The Bank of Canada’s weekly series for the six major banks showed a typical 5-year posted rate of 6.19% and a 3-year rate of 6.05% for October 14, 2026.

If your lender subtracts your discount, a bigger discount at signing means a lower comparison rate and a bigger penalty later. With a 1.05-point discount, $400,000 and 36 months left, the discount alone adds 1.05% x $400,000 x 3 = $12,600 to the raw IRD. That is why some borrowers see an IRD quote that seems far out of line with how much rates have actually moved.

Worked example: what breaking a $400,000 mortgage could cost

Here is a hypothetical borrower. You owe $400,000 on a 5-year fixed at 5.14%, which was 1.05 points below the posted rate when you signed. You have 36 months left, so the comparison term is three years. Today’s 3-year posted rate is RBC’s 6.25%. The table then asks what happens if posted rates fall before you break the mortgage.

Hypothetical example. Simple formula as published by RBC and the FCAC, before any administration fee or cash-back repayment. A lender using present value and a declining balance would charge less: our amortizing estimate (25 years remaining, semi-annual compounding) came to about $4,680, $10,080 and $15,570 for the three IRD cases in the middle column.

Two things stand out. First, if posted rates stay where they are, the penalty in this example is three months’ interest under either method. Second, once posted rates fall by a full point, the discount method more than doubles the penalty, from $5,140 to $11,280.

Breaking to get a lower rate: does it pay?

This is the question most people are really asking. The catch is that the IRD is designed to recover the interest you would save.

In the 1-point drop case above, suppose you break and sign a new 3-year term at 4.20%, which is the new posted rate minus the same 1.05-point discount. Your interest saving over 36 months, using the same simple method, is (5.14% minus 4.20%) x $400,000 x 3 = $11,280. That exactly matches the $11,280 penalty, so you gain nothing, and you still pay any discharge, legal or appraisal fees.

Breaking can still make sense when:

• The penalty is only three months’ interest and the rate drop is large enough that the savings clearly exceed it.
• You can get a better rate than the comparison rate, for example from another lender offering a deeper discount than you had.
• You are selling and cannot port. Then the question is the cost of the penalty, not whether the rate is better.
• You need to restructure, such as consolidating high-interest debt, where the rate saving is only part of the picture.

The five-year rule in the Interest Act

Section 10 of the federal Interest Act applies when a mortgage is not payable until more than five years after its date. After five years, the borrower can pay off the amount owing plus three months’ further interest in lieu of notice, and no further interest can be charged. The Act on Justice Laws is current to September 30, 2026.

In practice this matters for terms longer than five years, such as a 7-year or 10-year fixed. If you break a 10-year term in year seven, the penalty cannot go above three months’ interest. On a hypothetical $300,000 balance at 5.5%, that is $4,125. The section does not apply to mortgages given by corporations, so a property held in a company is outside it.

Variable-rate mortgages

A closed variable-rate mortgage is often charged three months’ interest rather than an IRD. RBC states this directly for its closed variable-rate mortgages: outstanding balance or amount prepaid, times your current rate, times three months. On a hypothetical $400,000 balance at 4.70%, that is about $4,700. Where there is no IRD, a variable mortgage can be cheaper to break. Compare current options in our 5-year variable mortgage rates guide.

How to reduce the penalty

1. Read your mortgage information box. The FCAC says federally regulated lenders must explain at the start of your agreement how the penalty is calculated and what factors affect it.
2. Use your annual prepayment privilege first. Paying down the allowed amount before you break lowers the balance the penalty is charged on. The FCAC notes some lenders restrict prepayments close to the break date, so check timing.
3. Ask about porting. If you are moving, the FCAC suggests asking whether you can take the mortgage with you instead of breaking it.
4. Get the exact payout quote for your date. RBC’s charge, for example, can change daily as the remaining term shortens.
5. Run the break-even. Compare the penalty plus fees with the interest you would save, using the same months. Our mortgage payment calculator can help with the new payment.
6. Wait for renewal if you can. At maturity you can switch lenders or pay down any amount without a prepayment charge.

Frequently asked questions

• Sources, checked October 21, 2026: FCAC: Mortgage fees, prepayment penalties (modified 2025-10-15); Interest Act, R.S.C. 1985, c. I-15, section 10, current to 2026-09-30; RBC: Understanding mortgage prepayment charges; RBC: Prepayment charge calculation example; RBC: Current mortgage rates (posted and special offer rates read October 21, 2026); Bank of Canada: Interest rates posted by the major chartered banks (values for October 14, 2026).
• Method: Penalties were calculated in Python with the simple formulas published by RBC and the FCAC, then checked two ways: by reproducing RBC’s $2,250 and $10,500 example and the FCAC’s roughly $3,000 and $12,000 example exactly, and by summing the monthly rate gap month by month. The amortizing estimate in the table note uses a 25-year remaining amortization, semi-annual compounding and monthly discounting at the comparison rate. All borrower figures are hypothetical.

Important: This guide is general information, not financial or legal advice. Your mortgage agreement sets the actual penalty, and lenders’ methods differ. Rates change often; check your lender’s current posted rates. Gizly is not paid by any lender mentioned here. See our affiliate disclosure.