Breaking Your Mortgage in Canada: When It Makes Sense (and When It Doesn’t)

Most Canadians sign a fixed-term mortgage expecting to stick it out till the end. But life happens — job changes, growing families, better rates, or debt consolidation needs often push homeowners to consider breaking their mortgage early.
While doing so can come with steep penalties, in many cases it could still make long-term financial sense. In this guide, we’ll walk you through how mortgage break penalties are calculated, when breaking your mortgage might be a good idea, and the alternatives you should consider first.

Do You Pay a Penalty for Breaking a Mortgage?

Yes — unless you have an open mortgage, you will pay a prepayment penalty if you break your mortgage contract before the term ends.

• Fixed-rate mortgage: You pay the greater of 3 months of interest or the Interest Rate Differential (IRD).
• Variable-rate mortgage: You typically pay only 3 months of interest.

That’s because fixed-rate mortgages are locked in based on long-term rate expectations, so lenders want to recover potential losses when rates drop.

Penalty Calculations: Fixed vs Variable Mortgages

Fixed-Rate Example:

Say you have a fixed-rate mortgage of $200,000 at 5.95%, with 2 years left on your 5-year term. The lender’s current 2-year rate is 4.34%.

3 Months Interest:

• $200,000 x 5.95% = $11,900 annual interest
• $11,900 / 12 = $991.67 monthly
• $991.67 x 3 = $2,975 penalty

IRD:

• 5.95% – 4.34% = 1.61%
• $200,000 x 1.61% = $3,220 annual difference
• $3,220 / 12 = $268.33 monthly
• $268.33 x 24 months = $6,439.92 penalty

Since the IRD is higher, that’s what you’d pay.

Variable-Rate Example:

Regardless of the term remaining, you’d only pay 3 months of interest.

Watch Out for Discounted IRD Calculations

Some banks apply a Discounted IRD formula, comparing your contract rate to a “discounted” posted rate. This often results in even higher penalties, especially if you got a discounted fixed rate when you signed.
Understanding how your lender calculates penalties is crucial before deciding to break your mortgage.

When Should You Break Your Mortgage?

1. Interest Rates Have Dropped

If market rates are significantly lower than your current rate, breaking and refinancing might save more money even after paying the penalty.

2. Life Changes

Relocating for work, divorce, or expanding your family may require a home move that triggers a mortgage break.

3. Consolidating Debt

Rolling high-interest debt into your lower-rate mortgage could be financially smarter — even with a penalty.

4. Better Mortgage Options

Sometimes another lender offers better terms or service that justifies paying the penalty to switch.

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Blend and Extend: A Softer Alternative

If the penalty is too high, ask your lender if they offer a blend and extend. This lets you combine your current mortgage rate with today’s lower rate and extend your term, without triggering penalties.

Blended Rate Example:

• Current rate: 5.95% with 2 years left
• New 5-year rate: 3.69%

Instead of paying a penalty, your new blended rate might be around 4.59% for the next 5 years.

Other Alternatives to Breaking Your Mortgage

• Port your mortgage to a new home and keep your current rate
• Early renewal within 120 days of maturity to avoid penalties
• Let a buyer assume your mortgage if allowed
• Use prepayment privileges to reduce your balance before breaking

Tips to Reduce Penalties

• Time it closer to your term’s end — penalties are lower
• Use lump-sum prepayments before breaking
• Know whether you’re subject to standard or discounted IRD

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Frequently Asked Questions

Is it cheaper to break a variable or fixed mortgage?
Variable mortgages usually cost less to break — only 3 months of interest. Fixed mortgages can be more expensive due to the IRD.

Can I avoid a penalty when switching lenders?
Only if you switch during your renewal period or opt for an open mortgage.

What if I can’t renew with my current lender?
You might consider switching to a B lender, improving your credit, adding a co-signer, or downsizing.

Final Thoughts

Breaking a mortgage isn’t something to do lightly. But in the right situation — like accessing a lower rate, consolidating debt, or adjusting for a life change — it could be the smart move.
Just make sure to get a clear picture of your penalty costs and run the numbers to see if the long-term gains outweigh the short-term hit. A mortgage professional can help compare all your options and find the best path forward.

🤔 Thinking of Breaking Your Mortgage Early?
Prepayment penalties can cost thousands — but sometimes, breaking your mortgage can still save you money long-term. Our mortgage experts can crunch the numbers and help you decide what’s right for you. 📞 Get a Free Mortgage Break Strategy Review