Costs and closing
Prepayment penalty
The charge for paying off a closed mortgage early: 3 months of interest on a variable, or the greater of that and the IRD on a fixed.
Also called prepayment charge.
Every closed mortgage has a prepayment charge, and the formula depends on the rate type. On a variable-rate mortgage it's 3 months of interest, which is predictable and about the same at every lender. On a fixed-rate mortgage it's the greater of 3 months of interest or the interest-rate differential, and when rates are falling the IRD is almost always larger.
The IRD is where penalties vary, because lenders use different comparison rates. On an ordinary balance with 3 years to run, the posted-rate and discounted-rate methods can differ by five figures.
Ways to reduce it: use your annual prepayment privilege first so the penalty is calculated on a smaller balance, wait until later in the term when fewer months remain, port the mortgage to a new property, or ask about a blend and extend.
On a term longer than 5 years, section 10 of the federal Interest Act caps the charge at 3 months of interest once 5 years have passed.
Related terms
Interest-rate differential (IRD)
A prepayment penalty calculated from the gap between your rate and a comparison rate, applied over the months left in your term.
Prepayment privilege
How much a closed mortgage lets you pay down each year without a penalty, typically 10% to 20% plus a payment increase.
Portability
A feature that lets you move your existing mortgage, rate and term to a new property instead of breaking it.
This definition describes how the term is used in Canadian residential mortgage lending. It’s general information, not advice on your file. Rules, thresholds and rates change. Where a figure is quoted, it’s current as of the date shown on the related guide.
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