Life doesn’t always follow a five‑year plan. You might get a new job in another city, want to move to a bigger or smaller home, or notice interest rates dropping and think refinancing could save you money. The challenge is that your mortgage might not be ready for that change. In Canada, breaking a mortgage early can trigger prepayment penalties that often cost thousands—or even tens of thousands—of dollars.
That doesn’t mean you’re stuck; it just means you need to understand how these penalties work and how to reduce or avoid them. This guide covers what mortgage penalties are, how much they typically cost, ways to minimize the fees, and when paying a penalty might actually be worth it if you’re planning to sell, refinance, switch lenders, or pay off your mortgage ahead of schedule.
Key Points
- Mortgage prepayment penalties in Canada occur when you break a mortgage early, through selling, refinancing, switching lenders, or exceeding prepayment limits.
- You can avoid penalties by taking advantage of prepayment privileges, choosing shorter or open mortgage terms, and porting your mortgage if you move.
- You can also reduce penalties by paying down your balance before refinancing or switching lenders.
What Are Mortgage Prepayment Penalty Fees?
A mortgage prepayment penalty is a fee your lender charges when you break your mortgage contract before the term ends.
Breaking a mortgage can happen when you:
- Sell your home
- Refinance your mortgage
- Switch lenders mid-term
- Pay off more than your allowed prepayment amount
From the lender’s point of view, a mortgage is a contract that guarantees them interest income for a set period of time. When you end that contract early, the lender loses some of that expected interest. The penalty is how they make up for it.
Think of it like cancelling a phone plan early. The provider isn’t mad—you’re just not holding up your side of the deal.
Mortgage penalties exist to protect lenders, not to punish borrowers. Still, the cost can come as a shock if you’re not prepared.
How To Avoid Mortgage Penalties (Before And After You Sign)
There’s no single strategy that works for everyone. The best approach depends on your plans, your risk tolerance, and how flexible you want your mortgage to be.
Instead of separating theory from real life, let’s walk through practical choices homeowners can make to reduce penalty risk.
Choose The Right Mortgage Term
Choose the right mortgage term by matching your financial goals with how long you want to commit to your rate and lender.
Shorter Terms vs. Long Fixed Terms
In Canada, five-year fixed mortgages are popular—but they’re not always the best fit.
| Long Fixed Terms | Short Fixed Terms (1 – 3 Years) |
| – Offer payment stability – Often come with higher penalties if broken early | – Usually have lower penalties – Offer more flexibility if your plans change |
If you think there’s a chance you’ll move, refinance, or change your mortgage within a few years, locking into a long fixed term can be risky.
A longer term might make sense if:
- You plan to stay in your home long-term
- You value predictable payments
- You’re comfortable with the penalty risk
A shorter term might be smarter if:
- Your job or family situation could change
- You expect rates to fall and want flexibility
- You’re unsure about staying put
Lower penalties don’t always come with lower rates—but flexibility has value too.
Choose An Open Mortgage (When It Makes Sense)
An open mortgage allows you to:
- Pay off your mortgage in full
- Refinance or sell
- Break the agreement
…with no prepayment penalty.
| The Downside of Open Mortgages There’s a catch to open mortgages. These usually come with: – Higher interest rates – Fewer options – Shorter terms They’re not meant for long-term borrowing. Instead, open mortgages work best if you: – Plan to sell soon – Expect a large sum of money (like an inheritance) – Want total flexibility for a short period For example, if you’re selling your home in six months, an open mortgage could save you far more in penalties than it costs in interest. |
Port Your Mortgage When You Move
Selling your home doesn’t automatically mean paying a penalty.
Many lenders allow you to port your mortgage. Porting means transferring your existing mortgage—rate, term, and balance—to a new property.
| When Porting Works Well | When Porting Doesn’t Work |
| – You’re buying a new home soon after selling – You want to keep your current interest rate – our lender approves the new property and mortgage amount | – There’s a long gap between selling and buying – Your new home costs much less – You need a very different mortgage amount – Your lender doesn’t approve the new property |
Porting rules vary by lender, so this is something to ask about before you list your home.
Understand Your Prepayment Privileges
Most Canadian mortgages come with built-in prepayment options. These allow you to pay down your mortgage faster without triggering a penalty, as long as you stay within the rules.
Common prepayment privileges include:
- Annual lump-sum payments (often 10–20% of the original balance)
- Increasing your regular payment amount
- Switching to accelerated payment schedules
| Why This Matters If you want to refinance later, lowering your mortgage balance ahead of time can: – Reduce your penalty – Lower interest costs – Improve your refinancing options For example, making lump-sum payments and increasing your payment frequency can shrink the balance used to calculate the penalty. The key is timing. Lump-sum payments often reset annually, and exceeding your allowed amount—even by a small margin—can trigger fees. |
Paying Down Your Mortgage Before Refinancing
Refinancing is one of the most common reasons homeowners face penalties.
Before refinancing, consider:
- Using your prepayment privileges first
- Making lump-sum payments within allowed limits
- Increasing payment frequency
These steps won’t eliminate a penalty entirely, but they can significantly reduce it.
Learn more: How To Refinance A Mortgage
Common Situations That Trigger Mortgage Penalties
Now let’s look at the most common real-world scenarios where penalties show up—and what homeowners can do about them.
Selling Your Home Before The Term Ends
This is the most common trigger. If you sell and don’t port your mortgage, the lender treats it as breaking the contract. The result is either:
- Three months’ interest, or
- An IRD penalty
How to reduce the impact:
- Ask about porting options early
- Time your sale closer to your renewal date
- Choose a shorter or more flexible term when buying
Refinancing Your Mortgage Early
Refinancing replaces your existing mortgage with a new one. That automatically breaks the original contract.
Homeowners refinance to:
- Access home equity
- Lower their interest rate
- Consolidate debt
To reduce the impact, consider the following:
- Compare interest savings against the penalty
- Pay down the balance before refinancing
- Wait until closer to renewal if possible
Switching Lenders Mid-Term
Switching lenders is similar to refinancing. Even if you’re just moving your mortgage to another bank for a better rate, the original lender still charges a penalty.
Some lenders offer cash incentives to cover part of the cost—but rarely all of it.
How to reduce the impact:
- Ask the new lender if they’ll help offset the penalty
- Compare net savings, not just the rate
- Consider waiting until renewal
Learn more: How To Switch Mortgage Lenders
Paying More Than Your Prepayment Allowance
Even homeowners who aren’t selling or refinancing can trigger penalties. If your mortgage allows a 15% lump-sum payment and you accidentally pay 16%, the extra amount may be penalized.
You can avoid this by doing the following:
- Track your prepayment limits carefully
- Confirm amounts with your lender before paying
- Space out payments across calendar years
When Paying A Penalty Might Still Make Sense
Avoiding penalties is smart—but avoiding them at all costs isn’t always the right move. There are situations where paying a penalty can still save you money overall.
If refinancing drops your interest rate enough, the long-term savings may outweigh the short-term cost.
| Example: Paying a $12,000 penalty might seem painful, but if the new mortgage saves you $3,000 per year in interest, you could break even in four years—and come out ahead after that. |
This is where mortgage penalty calculators and refinancing comparisons matter. Instead of focusing on the fee alone, look at:
- Total interest saved over time
- How long you plan to keep the mortgage
- Whether the new mortgage offers better flexibility
Real-world decisions aren’t about avoiding fees at all costs. They’re about minimizing total borrowing costs.
How Much Will Mortgage Penalties Cost You?
Short answer: it depends, but the range is wide.
In Canada, mortgage prepayment penalties typically fall into two categories:
1. Three Months’ Interest
This is common for:
- Variable-rate mortgages
- Fixed-rate mortgages close to the end of the term
The penalty is calculated as three months of interest on your remaining mortgage balance.
| Example: If your mortgage balance is $400,000 and your interest rate is 5%, three months’ interest would be roughly $5,000. |
2. Interest Rate Differential (IRD)
This is where things can get expensive.
The IRD compares:
- Your original mortgage rate
- The lender’s current rate for a similar term
If today’s rates are lower than what you locked in, the lender charges you the difference over the remaining term. This calculation can vary by lender and is often difficult to predict.
IRD penalties are most common with fixed-rate mortgages and can easily reach five figures, especially early in the term.
In general, mortgage penalties in Canada can range from a few thousand dollars to tens of thousands of dollars, depending on:
- Mortgage type (fixed vs. variable)
- Interest rates then vs. now
- Time left in your term
- Lender’s penalty formula
This is why understanding penalties before signing a mortgage is just as important as shopping for a low rate.
Learn more: Interest Rate Differential (IRD): Canadian Mortgage Penalty Explained
Final Thoughts
Mortgage prepayment penalties are one of the most misunderstood parts of homeownership in Canada. They’re not hidden—but they’re often overlooked until it’s too late. The best way to avoid or reduce these fees is to choose the right mortgage term and structure, understand your prepayment privileges, ask questions before signing, and compare total costs, not just interest rates.
And if you’re already in a mortgage, don’t assume breaking it is always a bad idea. Sometimes, paying a penalty is the price of making a smarter long-term move. A little planning can save you a lot of money—and a lot of frustration.
