What it costs to break a mortgage in Ontario — and how the IRD penalty is calculated

What breaking a mortgage costs in Ontario

If you break a closed mortgage in Ontario before the end of its term, the prepayment penalty will usually be the higher of two amounts: three months' interest on the balance you still owe, or the interest rate differential (IRD). That is the Financial Consumer Agency of Canada's own description, and it is the right starting point for every quote you will receive.

A penalty can apply in more situations than people expect. FCAC lists exceeding your annual prepayment privilege, breaking the contract, transferring to another lender before the end of the term, and paying the mortgage off early — including on a sale. An open mortgage has no prepayment penalty, which is the whole point of an open mortgage and also why it is priced differently.

What follows is the arithmetic, the part where lenders genuinely differ, and the costs that are not inside the penalty figure at all. The one thing I cannot give you here is your number. That lives in your mortgage contract and in your lender's method, and anyone quoting you a figure without both is guessing.

Three months' interest: the simple one

Three months' interest is an amount equal to three months of interest on the balance outstanding. There is not much to argue about. On a $400,000 balance it is three months of interest on $400,000 at your rate — one calculation, one answer, and broadly the same answer whoever runs it.

This is the floor. It is the amount you pay when the IRD works out to less, which typically happens when current rates for a comparable term are at or above your contract rate, or when you are near the end of your term and there is little remaining interest left to differentiate.

The interest rate differential: where the money is

The IRD is the remaining interest on your current term, computed at two different rates, with the difference being the penalty. FCAC describes those two rates as follows.

The first rate is either the posted rate at the time you signed, or your current rate — the discounted contract rate you actually pay. The second rate is either the current posted rate for a term similar to the time you have remaining, or that posted rate less the discount you originally received. The gap between the two, applied across your remaining term on your remaining balance, is the IRD.

Read that again, because the word “either” is doing enormous work. FCAC sets out two legitimate pairs of inputs, and your contract decides which pair your lender uses. Lenders usually apply the IRD rather than three months' interest when your rate is higher than the current rate and you signed less than five years ago.

The myth to stop repeating: “fixed means IRD, variable means three months”

You will read this everywhere, including on pages written by people in my industry. It is a tidy rule and it is not what FCAC says. FCAC's position is that the penalty is usually the higher of the two calculations — full stop. It does not assign one method to fixed mortgages and the other to variable.

The accurate statement is less satisfying and more useful: your lender's method and your contract decide. There is a real tendency in the market for variable-rate penalties to resolve to the simpler calculation and for fixed-rate penalties to resolve to the IRD, and I will explain in the fixed-versus-variable guide why that tendency matters when you are choosing a product. But a tendency is not a term of your contract. Your contract is a term of your contract.

If someone tells you with confidence what your penalty will be without having read your commitment letter and without naming your lender's formula, they are giving you a plausible number, not your number.

The costs that are not in the penalty quote

A penalty quote is a penalty quote. It is not a cost of closing. Several other items are contract-specific, and the only honest thing I can do is tell you what to look for rather than invent amounts.

Discharge and administration fees. Lenders commonly charge for preparing and registering a discharge. Ontario registration costs are real and separate from whatever your lender charges. Check both.Appraisal. Whether a new lender needs one, and who pays, varies. Some lenders cover it, some credit it back on closing, some do not.Cashback clawback. If you took a cash incentive at origination, breaking the term early typically triggers repayment of some or all of it, usually prorated for the unexpired portion. This is the item that surprises people most, because they spent the cash years ago.Legal and registration costs. If your mortgage is registered as a collateral charge rather than a standard charge, moving it generally means discharging and registering afresh, with the associated legal cost. Our collateral charge guide explains the mechanism and who tends to pay.Any other debts secured by the same charge. If a line of credit, car loan or credit card sits behind the same registration, those balances may need to be dealt with before the charge can be released.

When breaking a mortgage is the wrong move

I will tell clients not to do this more often than I tell them to do it, and I would rather say so on a public page than in a sales conversation.

If you are within roughly the last year of your term, the maths rarely works: there is little remaining interest for a rate improvement to act on, and the fixed costs of leaving do not shrink to match. If you are breaking in order to consolidate debt but your spending pattern has not changed, you are converting unsecured debt into debt secured against your home and you will likely be back in the same position with less equity — which is why the debt consolidation page starts with whether it is the right tool at all. And if the entire case rests on a rate comparison that happens to look favourable this week, the plan is fragile.

Where it frequently does work: a genuine change in circumstances that the existing mortgage cannot accommodate, a penalty that resolves to three months' interest rather than the IRD, a documented interest saving across a long remaining term that comfortably exceeds the full cost of leaving, or a refinance that solves an actual structural problem rather than shaving a payment. If you are weighing it, the switch versus refinance comparison will tell you which transaction you are actually contemplating.

Last reviewed October 2026. The description of prepayment penalties and the worked example above are drawn from FCAC's published guidance and are current as at this review. Discharge fees, administration fees, cashback clawbacks and penalty methodologies are contract-specific and change between lenders and over time — verify yours against your own documents. Nothing on this page is a quote.