Selling · Mortgage penalty · 2026
Three months' interest or the rate differential: the lender takes the higher, and it is not always the one you expect. Here is the formula, two examples, and three ways not to pay it when selling.
Paying off a mortgage before the end of the term, by selling or refinancing, costs a penalty to the lender. On a variable-rate loan it is three months' interest on the balance: $3,180 on $300,000 at 4.24%. On a closed fixed-rate loan it is the greater of three months' interest and the interest rate differential (IRD): the difference between your rate and the rate the lender could get today for the remaining term, applied to the balance over that term; the big banks often compute it with their posted rate minus the discount you received, which inflates the penalty. In 2026, someone who signed a fixed rate in 2023-2024 around 5% to 6% and pays out while current rates are near 4% can face an IRD worth several months' interest; someone who signed in 2020-2021 under 2% with a term ending in 2026 has a zero IRD and pays three months. The surest way to avoid it when selling is porting: moving the mortgage to the new house within the lender's window (often 90 to 120 days), or having the buyer assume it.
Three months' interest: balance × annual rate ÷ 12 × 3. On $300,000 at 4.24%, $3,180; on $400,000 at 4.24%, $4,240. This is the penalty on variable-rate loans and the floor on fixed-rate loans.
Interest rate differential (IRD): (your rate − the lender's comparison rate for the remaining term) × balance × remaining years. The comparison rate is what the lender charges today for a term matching what is left on yours; several big banks use their posted rate (higher) minus the discount you got, which raises the differential; alternative lenders and some credit unions use their actual rate. The mortgage contract states the method: read the clause before signing, and ask the lender for the written calculation before selling.
| Case | Balance | Your rate | Comparison rate | Remaining | 3 months | IRD | Penalty (the greater) |
|---|---|---|---|---|---|---|---|
| Fixed signed 2023 at 5.5%, current 4.2% | $400,000 | 5.5% | 4.2% | 2 years | $5,500 | $10,400 | $10,400 |
| Fixed signed 2021 at 1.9%, current 4.2% | $300,000 | 1.9% | 4.2% | 0.5 year | $1,425 | $0 (negative) | $1,425 |
| Variable at 3.45% | $350,000 | 3.45% | n/a | 3 years | $3,019 | n/a | $3,019 |
| Fixed at 4.24%, current 4.24% | $300,000 | 4.24% | 4.24% | 3 years | $3,180 | $0 | $3,180 |
The examples use a simple differential; with the posted-rate-minus-discount method, the first case can exceed $15,000. An open mortgage has no penalty but a higher rate; CMHC-insured and conventional loans follow the same penalty rules.
Port the mortgage: most closed loans can follow the borrower to the new property if the purchase closes within the window (often 90 to 120 days) and the new loan is approved; rate and term carry over, any additional amount is at today's rate. Have the buyer assume it, if the lender agrees and the rate is attractive, a selling point when your rate is below market. Sell at term maturity, or in the months before, when the penalty drops to three months or disappears. Otherwise, use the annual penalty-free prepayment (often 10% to 20% of principal) before paying out the rest, which lowers the balance the penalty is computed on.
Variable: balance × rate ÷ 12 × 3. Fixed: the greater of that amount and the interest rate differential (gap between your rate and the comparison rate, on the balance, for the remaining term). The lender must provide the written calculation.
If your rate is below current rates, the IRD is zero and three months' interest remains. If your rate is higher (signed 2023-2024), the IRD can be large.
Not deductible on a principal residence; rarely negotiable, but lenders often waive it when you port the mortgage or renew with them.
Usually yes, within the lender's window and after approval of the new loan; it is the most common way to avoid the penalty when selling to buy again.
To run your own numbers: the commission calculator, our fees and the mortgage calculator. French versions are linked below.
The Loaa & Manseur team, led by Lotfi Manseur and Loaa Al Daow, is the number 1 team at RE/MAX Platine in 2024 and 2025, 6th RE/MAX team in Quebec, 15th in Canada and in the global top 50 of large residential teams according to the official RE/MAX ranking, computed on actual transactions. Its Google profile counts 221 reviews with a 4.9 rating. Its offices are at 55 avenue de l'Équinoxe in Brossard, one bridge from the island, and every broker's licence can be checked in the OACIQ public register. Three things to verify yourself before calling us, and to demand of any other broker.
Also available in French: version française de ce guide.
Published September 7, 2026 by the Loaa & Manseur team, the number 1 team at RE/MAX Platine in 2024 and 2025, 6th RE/MAX team in Quebec, 15th in Canada and in the global top 50 according to the official RE/MAX ranking. Tell us about your project.
Équipe no 1 de RE/MAX Platine en 2024 et en 2025, 6e au Québec, 15e au Canada et dans le top 50 mondial au classement officiel RE/MAX. Réponse en moins de 24 heures, sept jours sur sept.