Mortgage Penalty Calculator 2024
Mortgage Break Penalty Calculator
What is the remaining balance on your mortgage?
What is the term-length and type of your current mortgage?
What is your current mortgage interest rate?
If applicable, what was the rate discount you received when you signed your current mortgage agreement?
When did your current mortgage start?
Who is your current mortgage lender?
What is RBC Royal Bank's current interest rate for a 3-year fixed rate mortgage?
How is my mortgage penalty calculated?
Are you looking to pay off your mortgage early? Or refinance the terms of your mortgage at a lower interest rate? Maybe you sold your home and purchasing a new home, in which a mortgage transfer will apply. Whatever the case, you most likely will have to pay a mortgage break penalty set by your lender. Whatever the situation, our calculator will help you determine the cost to break your mortgage so you can be confident about your mortgage decisions.
Fixed Rate Mortgage Penalty Interest Rate
For fixed-rate mortgages, lenders usually use the greater of three months of interest or an interest rate differential (IRD). Each lender has their own IRD calculation. The interest rate that they use for their IRD is usually based on either their current advertised mortgage rates or their posted rates, which can often be much higher.
| Advertised Rate IRD | Posted Rate IRD |
|---|---|
RBC TD Scotiabank CIBC BMO Peoples Bank motusbank Simplii Laurentian Desjardins CMLS Equitable Bank* | Tangerine Manulife Alterna Savings First National MCAP DUCA |
Variable Rate Mortgage Penalty Interest Rate
Most lenders determine the mortgage break penalty for a variable rate mortgage by calculating three months of interest. The interest rate that they use can depend from lender to lender, but is usually either your current mortgage interest rate or the lender's prime rate.
| Based On Your Mortgage Rate | Based On the Lender's Prime Rate |
|---|---|
RBC TD Scotiabank BMO Equitable Bank First National motusbank Tangerine MCAP National Bank Desjardins CMLS DUCA Manulife Alterna Savings Laurentian* | CIBC Peoples Bank Simplii Laurentian |
Mortgage Penalty FAQ
What does breaking my mortgage mean?
If you decide to end your mortgage before the prescribed term is up, then you are "breaking" your mortgage contract. For example, if you are 3 years into your 5-year fixed rate mortgage, and you find out that a lender is offering a significantly lower interest rate, then it is possible to break your mortgage early to sign a new mortgage with the discounted lender. But be aware, deciding to break your mortgage before the mortgage term ends is usually associated with penalties. However, some lenders may allow you to renew your mortgage early by a few months.
What is the difference between an open- and closed-term mortgage?
The major difference is the penalties associated with a closed-term mortgage. With an open-term mortgage you can pay off the entire mortgage amount whenever you want. You still have to pay your principal and interest amounts every month but you can make additional payments without having to pay a prepayment penalty (A penalty associated with a closed-term mortgage). This benefit is great, but most people usually opt for a closed-term mortgage agreement because an open-term mortgage usually has a higher interest rate. Since most individuals don't plan on paying off their mortgage early, they decide to go for the lower closed-term rate.
That being said, a closed-term mortgage is one that you take out for a specified amount of time. In Canada, the standard term is about 5 years. As mentioned, the main difference with a closed-term mortgage is you don't have the freedom to payoff your principal when you want. Some closed-term agreements allow you to pay off 10%-20% of principal once a year but outside of that, you will have to pay your lender a penalty fee for doing so.
How much will it cost to break my mortgage?
This depends as there are many costs associated with breaking a mortgage. The most significant cost you will incure is from the prepayment penalty. Depending on your lender, the prepayment penalty may differ. We highly recommend going over your current mortgage contract or talking with an experienced mortgage broker to get advice before making any decisions. However, you can avoid penalties by porting your mortgage.
The prepayment penalty differs from lender to lender. But generally, there are two methods in calculating the penalty:
Method 1: 3-months of Interest
For breaking a variable rate mortgage contract, the penalty is usually 3-months of interest applied to the remaining principal of your mortgage at your currently set interest rate. This method also applies to a fixed rate mortgage, if three months of interest is greater than the amount calculated in method 2 below.
Method 2: Interest Rate Differential (IRD)
This method is applied to a fixed-rate mortgage. The calculation is a bit more complicated. The penalty is the greater of either the total calculated by using Method 1, as described above, or the result of a calculation called the Interest Rate Differential (IRD).
The IRD is the difference between the interest you owe to your lender for the remainder of your mortgage contract and the interest your lender would receive by lending this money for the rest of your term with the same discount you were given. Alternatively, IRD is calculated as the difference between interest on your prepayment amount for the rest of your term at the non-discounted rate you originally signed your agreement subtracted by the amount of interest owing calculated at the closest posted rate your lender has at the current moment for the amount of time that is left on your agreement.
For example, if you had 2 years left on your 5-year fixed rate, they would look up their most up to date 2-year fixed mortgage rate. We know, it's a bit confusing! Let us make it easier to understand by calculating the IRD for a hypothetical scenario.
You have a 5-year fixed rate mortgage with a current interest rate of 3.25%. Of those 5 years you have 3 years left on your agreement with a current principal value of $400,000. You decided to break your mortgage contract and so this is how the IRD is calculated.
- First the lender will get the non-discounted rate that was posted the day you signed your mortgage agreement 2 years ago. So you may be paying 3.25% but the actual rate was 4.0% on that day. Which means you got a discount of .75%.
- Next, the lender will see that you have 3 years left on your agreement and will find a similar product that they have, right now, to cover the remainder of your 5-year term. In this example, that would be a 3-year fixed rate mortgage let's say at a rate of 2.75%.
- Finally, the lender takes the difference of rates 4.0% and 2.75% (.04 - .0275 = .0125), divides that by 12 to get the monthly interest rate. (.0125 divide 12 = .00104), multiplies the monthly interest rate value by the 36 months (3 years) you have remaining on your mortgage (.00104 x 36 months). Then, multiplies this 36 month amount by your $400,000 principal to get your prepayment penalty (.00104 x 36 months) x $400,000. Thus, you will pay around $15,000 as a prepayment penalty.
As you can see the penalty is not the most intuitive so please seek professional advice for the most accurate info on your lender.
How will the stress test affect you?
If you are breaking your mortgage and staying with the same lender, then you do not have to worry about the stress test.
But whenever you apply for a mortgage with a new lender, you must pass the stress test again to ensure that you can afford your mortgage’s monthly payments. The interest rate the lender will use is either your mortgage rate plus 2% or the benchmark rate of 5.25%, whichever is higher. If you don't pass, you will not be able to qualify for the new mortgage. This benchmark rate of 5.25% is subject to annual review by the minister of finance and the Office of the Superintendent of Financial Institutions.
Does it makes sense to break your mortgage?
It depends on your situation.
If you're trying to save money by pre-paying your mortgage or lowering your interest rate, then you should compare your potential savings to your mortgage pre-payment penalty. For fixed-rate mortgages, this penalty can be significant especially if you still have a few years left on your mortgage.
If you are breaking your mortgage to refinance, then you should also consider other options such as HELOCs and second mortgages. They can let you borrow from the equity in your home without breaking your current mortgage.
Is there any limitation on the prepayment penalty a lender can charge?
According to paragraph 10 of the Interest Act, after five years from the date of advancing the mortgage, the most a lender can charge for breaking the mortgage is three months of interest in lieu of notice. Before five years, the Interest Act has not imposed any limit, and your mortgage contract will determine the breaking penalty. Some mortgages do not allow breaking the mortgage except for a bona fide sale.
Mortgage Penalties by Lender
| Bank or Lender | Variable Rate Mortgage | Fixed Rate Mortgage |
|---|---|---|
| 3 Months’ Interest | Greater of 3 Months’ Interest or the IRD amount | |
| 3 Months’ Interest | Greater of 3 Months’ Interest or the IRD amount | |
| 3 Months’ Interest | Greater of 3 Months’ Interest or the IRD amount | |
| 3 Months’ Interest (at the CIBC Prime rate) | Greater of 3 Months’ Interest (at your current mortgage rate) or the IRD amount | |
| 3 Months’ Interest | Greater of 3 Months’ Interest or the IRD amount | |
| 3 to 5 Months’ Interest* | Greater of 3 Months’ Interest or the IRD amount | |
| 3 Months’ Interest (at PBC’s Prime rate) | Greater of 3 Months’ Interest or the IRD amount | |
| 3 Months’ Interest | Greater of 3 Months’ Interest or the IRD amount | |
| 3 Months’ Interest | Greater of 3 Months’ Interest or the IRD amount | |
| 3 Months’ Interest | Greater of 3 Months’ Interest or the IRD amount | |
| 3 Months’ Interest based on the Simplii Prime Rate | Greater of 3 Months’ Interest or the IRD amount | |
| 3 Months’ Interest | Greater of 3 Months’ Interest or the IRD amount | |
| 3 Months’ Interest | Greater of 3 Months’ Interest or the IRD amount | |
| Greater of 3 Month’s Interest based on your current annual mortgage rate or the current prime rate. | Greater of 3 Months’ Interest or the IRD amount | |
| 3 Months’ Interest | Greater of 3 Months’ Interest or the IRD amount | |
| 3 Months’ Interest | Greater of 3 Months’ Interest or the IRD amount | |
| Lesser of 3 Months’ Interest or, the remaining interest to be paid on your mortgage. | Greater of the IRD amount, and, the lesser of 3 Months’ Interest, or, the remaining interest to be paid on your mortgage. | |
| Greater of 3 Months’ Interest at DUCA’s current posted rate and the difference in interest payable due to the difference between the quoted posted rate when the mortgage was signed and DUCA’s current posted rate for a mortgage with a comparable term. | Greater of 3 Months’ Interest or the IRD amount | |
| 3 Months’ Interest | Greater of 3 Months’ Interest or the IRD amount | |
| 3 Months’ Interest | Greater of 3 Months’ Interest or the IRD amount | |
| 3 Months’ Interest | Greater of 3 Months’ Interest or the IRD amount | |
| 3 Months’ Interest | Greater of 3 Months’ Interest or the IRD amount | |
| 3 Months’ Interest | Greater of 3 Months’ Interest or the IRD amount |
* Penalty for a Standard Equitable Bank Adjustable Rate Closed Term Mortgage is as follows:
- 5 months’ interest during the first year of your term.
- 4 months’ interest during the second year of your term.
- 3 months’ interest after the second year of your term.
Penalty for an EQB Evolution Suite Adjustable Rate Closed Term Mortgage is 3 months' interest.
What are the reasons for breaking a mortgage?
Some scenarios:
- The current interest rate on your mortgage is 4.2% and you have 2-years left on your 5-year fixed rate before you have to renew. You do some research and your bank is currently offering 3.1% on a 5-year fixed rate. Because of current events, you suspect that you won't be able to get this low rate a few years from now. You do the math and it looks like you'll save more money in the long run if you switch now.
- You have a variable rate mortgage and you notice the rates are as low as you have ever seen them. So to lock in this new low rate you decide to switch to a fixed rate mortgage.
- You have come into a large sum of money and want to use it to pay off $200,000 of your mortgage principal but can't because this amount is much higher than what is allowed in your mortgage contract. Thus, you must break your mortgage agreement to proceed.
- You cannot afford your current mortgage monthly payments. The solution would be to get a new mortgage with a longer amortization period so the monthly payments are reduced. An amortization calculator can let you find out how much you can lower your mortgage payments by stretching out your amortization period.
- You have a accumulated a significant amount of credit card debt that is accruing interest at a rate of 19.99%. Your financial advisor strongly suggests consolidating your high interest credit card debt into your mortgage by taking equity out your home and refinancing.
Posted Rates of Banks and Lenders
| Term | Posted Rate |
|---|
Disclaimer:
- Any analysis or commentary reflects the opinions of WOWA.ca analysts and should not be considered financial advice. Please consult a licensed professional before making any decisions.
- The calculators and content on this page are for general information only. WOWA does not guarantee the accuracy and is not responsible for any consequences of using the calculator.
- Financial institutions and brokerages may compensate us for connecting customers to them through payments for advertisements, clicks, and leads.
- Interest rates are sourced from financial institutions' websites or provided to us directly. Real estate data is sourced from the Canadian Real Estate Association (CREA) and regional boards' websites and documents.