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Three months’ interest is a prepayment penalty equal to three months of interest on the outstanding balance at the mortgage’s contract rate. It is the standard penalty for breaking a variable-rate mortgage early, the minimum lenders compare against the interest rate differential on fixed-rate mortgages, and the maximum penalty allowed by law once an individual borrower passes the five-year mark under the Interest Act.
Three months’ interest is the simplest of the two prepayment penalty formulas Canadian lenders use: three months of interest on the outstanding balance, calculated at the mortgage’s contract rate. It’s the standard — often the only — penalty on a variable-rate mortgage.
On fixed-rate mortgages, three months’ interest acts as the floor: the lender compares it against the interest rate differential and charges whichever is larger. When rates haven’t moved much since the mortgage was signed, three months’ interest is usually the bigger — and therefore the operative — number.
It also has a statutory role: under section 10 of the federal Interest Act, an individual borrower with a mortgage term longer than five years can prepay the full balance after the five-year mark for a maximum penalty of three months’ interest, overriding whatever a lender’s own formula would otherwise produce.
3-month penalty = Balance × Contract rate ÷ 12 × 3
Standard on variable-rate mortgages: most lenders charge three months’ interest as the only prepayment penalty on a variable-rate mortgage broken before maturity.
The floor for fixed-rate penalties: on fixed-rate mortgages, three months’ interest is the minimum a lender compares against the interest rate differential — whichever is larger is charged.
Statutory cap after five years: under section 10 of the federal Interest Act, an individual borrower with a mortgage term over five years can prepay the balance in full after the five-year mark for a maximum penalty of three months’ interest.
Who checks which applies: mortgage agents (Ontario, FSRA), submortgage brokers (BC, BCFSA), mortgage associates (Alberta, RECA), and courtiers hypothécaires (Quebec, AMF) confirm whether a client’s mortgage type and timing trigger the three-month formula or the IRD.
A borrower breaks a variable-rate mortgage with a $400,000 balance at a contract rate of 5.49%:
$1,830 × 3 = $5,490. On a variable-rate mortgage this is typically the entire penalty; on a fixed-rate mortgage, the lender would also check the IRD and charge whichever figure is larger.
Definitions reflect Canadian federal and provincial rules as of the “Updated” date above. Not advice for any specific file.
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