Mortgage prepayment penalty calculator (IRD vs 3 months' interest)

How the penalty is calculated

On a closed fixed mortgage the penalty is the greater of two figures. On a closed variable it’s normally 3 months’ interest only. On an open mortgage there’s normally no charge.

three months’ interest = balance × contract rate ÷ 4

IRD = max(0, balance × (contract rate − comparison rate) × months remaining ÷ 12)

The interest rate differential floors at zero, so it’s never negative. If rates have risen since you signed (as they have for anyone leaving a pandemic-era rate), there’s no differential to charge and the penalty is 3 months’ interest.

How lenders set the comparison rate

Both methods use the same IRD formula. They differ in one input, and that input can be worth thousands.

A monoline or broker lender typically compares your contract rate against its current rate for the term closest to the time you have left. A Big Six bank typically uses the discounted posted method: it works out the discount you originally received off its posted rate, then subtracts that same discount from today’s posted rate for the comparison term.

original discount = posted at signing − your contract rate
comparison rate = current posted − original discount

The bank method produces a larger penalty than the monoline method whenever your original discount off posted exceeds today’s gap between posted and market rates for the comparison term. On a $400,000 balance at 5.49% with 24 months left: with a 1.70% original discount the bank method gives $8,400 against the monoline’s $12,000, which is smaller. With a 2.90% original discount it gives $18,000, which is 50% larger. Which way it goes depends on your figures, so this page always shows both methods.

Use your prepayment privilege first

Most closed Canadian mortgages let you prepay 10% to 20% of the original principal each year without any charge. Prepaying that amount before you break lowers the balance the penalty is calculated on, and the penalty drops in proportion.

On the same $400,000 balance with a $450,000 original principal and a 15% privilege: applying $67,500 first drops the balance to $332,500 and the penalty from $12,000 to $9,975. That’s a $2,025 saving.

You normally have to prepay before the payout, not as part of it, and not every lender allows it in the same calendar year as a discharge. Ask your lender in writing before you give anyone instructions.

Simple vs. precise 3 months’ interest

The quoted figure is balance × rate ÷ 4. Converted on the Canadian semi-annual convention, it’s balance × ((1 + j/2)^(1/6) − 1) × 3, which is always slightly smaller: $5,428.24 instead of $5,490.00 at 5.49% on $400,000. The estimate uses the simple figure because that’s what a payout statement shows. The precise one sits beside it so you can see the difference.

What this calculator can’t see

It can’t see your contract. Lenders define the comparison term differently and use different posted-rate tables. Some use the rate in effect on your original commitment date instead of your signing date. Some add an administration or discharge fee. A few variable products charge an IRD even though most don’t.

This is an estimate. Get a written payout statement from your lender before you make any decision. It’s free. Send it to us and we’ll go through it with you.