Hustle & GritWatch us on YouTube
A prepayment penalty is the charge a lender applies when a borrower pays off or pays down a closed mortgage beyond its prepayment privileges before the term ends. Canadian lenders generally charge the greater of three months’ interest or the interest rate differential on fixed-rate mortgages, and typically three months’ interest on variable-rate mortgages.
A prepayment penalty is what a lender charges when a borrower pays down or pays off a closed mortgage beyond what their prepayment privileges allow before the term ends. It compensates the lender for the interest income it loses when the contract ends early.
The formula depends on the mortgage type. Fixed-rate mortgages are typically penalized using whichever is larger of the interest rate differential or three months’ interest; variable-rate mortgages are typically charged three months’ interest only, since there’s no fixed rate to compare against a current one.
An open mortgage is the way to avoid the penalty entirely — it can be paid off at any time, in exchange for carrying a higher rate throughout the term.
Fixed vs. variable methodology: fixed-rate mortgages are typically penalized using whichever is larger, the interest rate differential or three months’ interest; variable-rate mortgages are typically charged three months’ interest only.
Open mortgages avoid it: an open mortgage can be paid off in full at any time without a prepayment penalty, in exchange for a higher rate.
Interest Act backstop: under section 10 of the federal Interest Act, an individual borrower with a mortgage term over five years can prepay in full after the five-year mark for a maximum penalty of three months’ interest.
Who calculates it: mortgage agents (Ontario, FSRA), submortgage brokers (BC, BCFSA), mortgage associates (Alberta, RECA), and courtiers hypothécaires (Quebec, AMF) request the exact penalty quote from the lender before advising a client to break a term.
Definitions reflect Canadian federal and provincial rules as of the “Updated” date above. Not advice for any specific file.
Every term a Canadian mortgage professional needs — defined, sourced, and kept current.
See how Treadstone can scale your brokerage — a free call, no commitment.