Breaking a fixed-rate mortgage before the end of its term triggers whichever is larger of two calculations: three months' interest, or the interest rate differential (IRD). The IRD approximates what the lender loses by re-lending the payoff amount today at a lower prevailing rate for the term remaining — broadly, the gap between the client's contract rate and a comparable current rate, multiplied by the outstanding balance and the time left. Lenders are required to disclose in plain language how they calculate this penalty and to provide an exact quote on request; the calculation is not standardized across lenders, so two lenders can produce different penalty figures for what looks like the same scenario, particularly because the comparison rate each lender uses to calculate IRD is drawn from their own posted rates.
Breaking a variable-rate mortgage typically triggers only the three months' interest calculation — there is no IRD, because there is no fixed rate differential to measure against. This asymmetry is one of the practical, non-rate reasons some clients lean variable even when they have no strong rate view either way: the cost of an unplanned early exit is generally lower and far more predictable than it is on a fixed term, where the IRD in a falling-rate environment can be substantially larger than three months' interest.
Separate from penalties, most closed mortgages include annual prepayment privileges — the ability to pay down a lump sum, increase the regular payment, or both, without triggering any penalty, up to limits set by that specific lender. These limits vary meaningfully across lenders and are not set by regulation, so they belong in the product conversation covered in the previous module rather than being assumed identical everywhere. A client who plans to pay down aggressively should have this checked and compared before signing, not discovered as a constraint after the fact.
Porting lets a client take their existing rate and remaining term to a new property instead of breaking the mortgage and paying a penalty, provided the new property closes within the lender's allowed window and the client still qualifies. For an insured mortgage, porting also interacts with the insurance premium already paid. CMHC's published portability schedule offers a premium credit against the new insurance premium based on how much time has passed since the original closing: a full credit within 6 months, a 50% credit within 12 months, and a 25% credit within 24 months, with no credit available beyond that window — though porting itself may still be possible. Where the new property's loan-to-value or loan amount increases relative to the old one, an additional premium applies to that incremental portion; a true straight port with no increase in LTV, loan amount or amortization can, under the right conditions, carry no new premium at all.
Where breaking is unavoidable but a full penalty feels disproportionate, some lenders offer a blend-and-extend: combining the existing rate with a new rate for an extended term into a single blended rate, avoiding the penalty calculation entirely in exchange for a longer commitment at a rate that is not the lowest currently available. It is a middle path worth raising with a client weighing a full break against staying put, not a universal fix, and its availability and pricing vary by lender.
A client wants to break their 5-year fixed mortgage two years early, in a rate environment where current rates are lower than their contract rate. Which penalty calculation is most likely to apply, and why?
Fixed-rate penalties are charged at the greater of three months' interest or the IRD, and the IRD tends to be the larger figure precisely when current rates have fallen well below the client's contract rate — the lender is losing more by re-lending at today's lower rate. The lender applies whichever calculation is greater, not whichever the client prefers, and selling the property does not itself waive the penalty on a fixed term broken early.
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