THE TWO TYPES OF MORTGAGE PENALTY CALCULATIONS

Mortgage penalties can be shocking if homeowners aren’t prepared. Breaking a mortgage early — whether due to refinancing, life changes, or moving — comes with a cost. These penalties are clearly outlined in every mortgage contract, but many borrowers don’t fully understand them until it’s too late.

Here’s what homeowners need to know about how penalties are actually calculated 👇

1️⃣ Three months’ interest penalty

This is the simpler penalty type.

✔️ applies mostly to variable-rate mortgages

✔️ calculated using the interest portion of the payment

✔️ usually the lowest penalty

Example:

$300,000 mortgage at 2.79%

Interest ≈ $693.48/month

Penalty = $693.48 × 3 months = **$2,080.44**

This method is predictable and easier to estimate.

2️⃣ Interest Rate Differential (IRD)

The IRD is more complex and often much more expensive.

✔️ used primarily for fixed-rate mortgages

✔️ based on the difference between your rate and today’s rate

✔️ varies significantly by lender

The calculation considers:

✔️ the amount being prepaid

✔️ the remaining term

✔️ the rate the lender can re-lend at today

Because lenders use different comparison rates, penalties can vary wildly between institutions.

3️⃣ Why IRD penalties vary so much

There is no universal formula in Canada for IRD.

✔️ some lenders use discounted rates

✔️ others use posted rates

✔️ differences can mean thousands of dollars

Two lenders using different comparison rates may produce completely different penalty amounts — even if the mortgage details are identical.

4️⃣ Important things homeowners should know

✔️ lenders always charge the **greater** of 3 months’ interest or IRD

✔️ always call the lender directly for an accurate quote

✔️ online calculators are often unreliable

✔️ penalties can be reduced by porting the mortgage

✔️ waiting until the end of the term eliminates the penalty

Understanding these rules can prevent costly surprises during refinancing or selling.

5️⃣ Why variable-rate mortgages often have lower penalties

Variable-rate mortgages typically use only the 3-month interest calculation.

✔️ simpler

✔️ predictable

✔️ less expensive to break

This is why many homeowners choose variable rates when flexibility is a priority.

💬 Final Thought

Mortgage penalties are part of every contract — but the calculation can vary dramatically depending on the lender, term, and rate type. Knowing how these penalties work empowers homeowners to make smarter decisions and avoid unnecessary costs.

For a personalized penalty review or comparison, send The Frontline Mortgage Group a message anytime.