In Canada, the penalty for breaking a closed mortgage is the higher of two amounts: three months' interest, or the interest rate differential (IRD) computed over the remaining months of your term. On a variable rate, it is almost always three months' interest, roughly $4,500 on a $400,000 balance at 4.5%. On a fixed rate, most big banks compute the IRD from their posted rate rather than the discounted rate you actually pay, which can multiply the penalty five or tenfold for the very same loan compared with monoline lenders. Before selling or refinancing, request the exact penalty amount and its calculation method in writing, because that single number changes the whole strategy. Porting the mortgage to your next home, using annual prepayment privileges just before breaking, or simply timing the sale closer to maturity can each cut the bill substantially.
Three months' interest or IRD: the two formulas
Nearly every closed mortgage contract sets the penalty at the higher of: three months' interest (balance × rate ÷ 4, so about $4,500 on a $400,000 loan at 4.5%), or the interest rate differential, meaning the gap between your rate and the rate at which the lender can re-lend for your remaining term, applied to your balance until maturity.
On a variable rate, the penalty is effectively capped at three months' interest. On a fixed rate, everything depends on how the lender computes the IRD.
Why the IRD balloons at some lenders
Most large banks calculate the IRD from their posted rate at signing minus your discount, while monoline and digital lenders use actual market rates. Same balance, same remaining term: the penalty can differ fivefold between institutions.
Timing matters too. The more years left on your term and the more rates have fallen since you signed, the bigger the IRD. Canada's prime rate sits at 4.45% in summer 2026; if you locked a much higher fixed rate in 2023 or 2024, get your penalty quoted now, because refinancing may already pay for itself. If your term is simply coming due, see our French guide on mortgage renewal.
Five ways to cut the penalty
- Use your prepayment privilege first. Most contracts allow 10-20% of the balance per year penalty-free; paying it down the day before you break shrinks the base the penalty is computed on.
- Time the sale. A few months from maturity, the penalty melts away.
- Port the mortgage to your next property: no break, no penalty.
- Negotiate. Staying with the same lender for the next mortgage is leverage; a strong credit file helps.
- Check the discount clause. Some contracts subtract your original rate discount from the IRD, others do not; the difference runs into thousands.
Porting instead of breaking
Porting moves your mortgage, rate and maturity to the new property. If the new loan is bigger, the lender blends a new tranche at today's rate. Deadlines are tight: most lenders require the sale and purchase to close within 30 to 120 days of each other. It is the first scenario to examine when you sell in order to buy again.
Selling with a penalty: run the full math
The penalty is only one line of the calculation that matters: sale price, minus mortgage balance, minus penalty, minus selling costs equals your net proceeds. Our team requests the official penalty letter from your lender before listing and plans the sale date around your maturity, not the other way round. English-speaking sellers and buyers can start with our welcome tax guide and promise to purchase guide.
Know your net proceeds before you list.
A team broker will request your penalty letter and build the full picture with you, in English or French, no strings attached.
Frequently asked questions
How is a mortgage penalty calculated in Quebec?
It is the higher of three months' interest (balance × rate ÷ 4) or the interest rate differential: the gap between your rate and the lender's current rate for your remaining term, applied to your balance until maturity. Variable-rate mortgages are effectively capped at three months' interest. Always request the exact calculation in writing.
Can I avoid the penalty when I move?
Often, yes. Porting transfers your mortgage, rate and term to the new property with no break. If porting is not possible, using your annual prepayment privilege before breaking, timing the sale near maturity, or negotiating absorption with the lender that gets your next mortgage all reduce the bill.
Why is my fixed-rate penalty so much higher than three months' interest?
Because your lender applies the interest rate differential computed from its posted rate at signing, not the discounted rate you actually pay. That method inflates the gap between your rate and current rates, especially early in the term. Monoline lenders using actual rates quote far smaller penalties for the same loan.
Published on July 30, 2026 by the Loaa & Manseur team, #1 team at RE/MAX Platine in 2024 and 2025 · Tell us about your project