Updated October 23, 2026 · By Jatin Sood, Mortgage Agent Level 2
Quick answer: If you pay off, refinance or move a closed mortgage to another lender before your term ends, your lender can charge a prepayment penalty. The Financial Consumer Agency of Canada (FCAC) says it is usually the higher of three months’ interest on your balance or the interest rate differential (IRD). Ask your lender for the exact amount in writing before you decide; it can be small or very large depending on your rate, your balance and the time left in your term.
Many homeowners in Brampton and the GTA are looking at refinancing, selling or switching before their renewal date. Before you sign anything new, it is worth knowing what it costs to leave your current mortgage. This guide is general information, not advice for your situation.
What is a mortgage prepayment penalty?
A prepayment penalty is a fee your lender may charge when you pay more than your contract allows, break your mortgage contract, transfer it to another lender before the term ends, or pay off the full balance early, including when you sell your home (FCAC). Lenders may also call it a prepayment charge or a breakage cost. An administration fee can be added on top.
Open mortgages let you prepay without a penalty. Most mortgages are closed, which is why the penalty matters.
How is the penalty calculated?
According to FCAC, the penalty is usually the higher of:
- Three months’ interest on the amount you still owe, or
- The interest rate differential (IRD)
FCAC says lenders typically use the IRD when your current mortgage rate is higher than today’s rate and you signed your contract less than five years ago. The final amount depends on how much you prepay, how many months are left in your term, current interest rates and the method your lender uses.
What is the interest rate differential (IRD)?
The IRD is roughly the interest your lender loses because you are leaving early. FCAC explains that the lender works out the interest on the rest of your term at two rates and takes the difference:
- The first rate is your contract rate, or the posted rate when you signed.
- The second rate is today’s posted rate for a similar term, sometimes minus the discount you originally received.
Lenders don’t all use the same posted rates or the same method, so two mortgages with similar balances can have very different penalties. FCAC’s own example shows how wide the gap can be: on a $200,000 balance with 36 months left, three months’ interest was about $3,000, while the IRD came to about $12,000. That example is illustrative only; your number depends entirely on your contract.
Is there a limit after five years?
For some longer mortgages, yes. Under section 10 of the federal Interest Act, when a mortgage on real property isn’t payable until more than five years after its date, a borrower can pay it off once five years have passed by paying the amount due plus three months’ further interest. This does not apply to mortgages given by a corporation. The rule only matters for mortgages that run longer than five years, so ask your lender or lawyer whether it applies to yours.
How can I reduce a prepayment penalty?
FCAC lists several ways to lower or avoid the cost:
- Use your prepayment privileges. Your mortgage may let you increase payments or make a lump-sum payment each year without a penalty. Unused amounts usually don’t carry over.
- Make a lump-sum payment first. A permitted prepayment before you break the contract lowers the balance the penalty is based on. Check whether your lender restricts prepayments close to that date.
- Ask about porting. If you are selling and buying another home, some mortgages can move with you and keep their rate and terms.
- Wait until your term ends. If the penalty is large, renewing or switching at maturity may cost far less than leaving mid-term.
What should my lender tell me?
FCAC says federally regulated lenders must give you an information box at the start of your mortgage agreement covering prepayment privileges and penalties, and must explain how the penalty is calculated in language that is clear, simple and not misleading. Many banks also offer penalty calculators.
The simplest step is to call your lender and ask for a written penalty quote with a specific payout date. If you are working with a mortgage agent in Ontario, FSRA requires written disclosure of the total cost of borrowing, the material risks and any fees before you commit.
When does breaking my mortgage make sense?
There is no single answer. People usually look at breaking early when they are selling, when they want to refinance to consolidate higher-interest debt, or when their circumstances have changed. The question is always whether the benefit outweighs the full cost: the penalty, any administration, legal, appraisal or discharge fees, and the terms of the new mortgage. Our pages on mortgage refinancing in the GTA and mortgage renewal in Brampton explain those options, and the mortgage calculator helps you compare payments.
Frequently asked questions
Do I pay a penalty if I switch lenders at renewal?
Usually not if you switch at the end of your term, because the contract has ended. Switching before the maturity date can trigger a prepayment penalty. Other costs, such as legal or discharge fees, may still apply, so ask for them in writing.
Is the penalty different for fixed and variable mortgages?
It can be. FCAC says lenders typically use the IRD when your rate is higher than current rates and your contract is less than five years old. Your own mortgage agreement sets out which method applies to you.
Can I avoid a penalty when I sell my home?
Sometimes. If your mortgage is portable, you may be able to move it to your next home. Otherwise, using your yearly prepayment privileges before the sale can reduce the penalty. Ask your lender which options your contract allows.
Talk it through
If you are thinking about refinancing, selling or switching before your term ends in Brampton or the GTA, book a free 15-minute review or call or WhatsApp 647-569-8109. We can go through your lender’s penalty quote together in English, Punjabi or Hindi. A review is not a mortgage application or an approval.
Sources (checked October 21, 2026)
- Financial Consumer Agency of Canada, “Mortgage fees: Prepayment penalties”, date modified 2025-10-15: canada.ca
- Interest Act (R.S.C., 1985, c. I-15), section 10, current to 2026-09-30: laws-lois.justice.gc.ca
- FSRA, “Working with a Mortgage Professional” (read 2026-10-14): fsrao.ca
Jatin Sood, Mortgage Agent Level 2, Lic. #M24002757, The Mortgage Centre – Hard Money Approvals, Brokerage #12880. Independently owned and operated. General information only; not financial, legal or tax advice. Approval depends on the lender’s review.