The penalty is “usually calculated as the greater of” three months’ interest or the Interest Rate Differential (IRD), per the Financial Consumer Agency of Canada — not an average of the two. A variable-rate mortgage only ever pays three months’ interest; a fixed-rate mortgage pays whichever of the two is larger at the moment you break, and that can flip within the same term as the months remaining shrink. Below: a second worked example showing when three months’ interest overtakes the IRD, four FCAC-sourced ways to cut the bill before you break, and why the federal Interest Act — not a mortgage-broker blog — is the actual source for “Canadian mortgages compound semi-annually.”
A second worked example: when three months’ interest overtakes the IRD
The walkthrough above breaks a mortgage with three years left in the term, where the IRD wins. The IRD shrinks as the remaining term shrinks — it is multiplied by the years left — while three months’ interest does not scale down the same way. Close to the end of a term, that makes three months’ interest the larger, and therefore the applicable, figure under FCAC’s “greater of” rule. Take a hypothetical C$260,000 balance on a 5.19% fixed contract rate with only 3 months left in a 5-year term:
Run both the IRD and three-month-interest math for your own months-remaining number in the calculator above rather than assuming either one wins — the crossover point depends on your balance, rate, and how close you are to your renewal date.
Four ways to cut or avoid the penalty before you break
FCAC publishes specific strategies for reducing a prepayment penalty rather than just paying whatever the lender first quotes (FCAC, reducing prepayment penalties):
- ·Use your annual prepayment privilege first — paying down as much of the allowed lump sum as you can before breaking shrinks the balance the penalty is calculated on.
- ·If the penalty would be large, consider waiting until closer to term end, since — as the example above shows — the IRD component shrinks as the remaining term shrinks.
- ·Ask your current lender about porting the mortgage to a new property instead of breaking it outright, which can avoid the penalty entirely if the new property and timing qualify.
- ·Shop lenders and brokers before your renewal date rather than after signing a new term, since switching is cheapest at the natural break point in the contract.
If your mortgage is open rather than closed, none of this applies — FCAC states plainly that an open mortgage can be prepaid or paid off with no penalty at all, so check your mortgage type before running any penalty math.
Why the walkthroughs use simple interest — and your lender’s exact number won’t
Both worked examples on this page use simple interest for clarity, but that is not how a Canadian lender actually compounds a fixed-rate mortgage. Section 6 of the federal Interest Act requires that a mortgage on real property state its interest rate “calculated yearly or half-yearly, not in advance” for any interest to be chargeable on the principal at all — the statutory basis for why Canadian fixed mortgages are quoted and compounded semi-annually rather than monthly, the way many other countries’ mortgages are. That compounding basis is folded into your lender’s exact IRD and three-month-interest figures, so a hand calculation using simple interest — including the ones above — will land close to, but not identical to, your actual payout statement. Request that statement in writing before you commit to a number.
Methodology
Both worked examples use hypothetical balances and rates to demonstrate the mechanics FCAC describes; only the underlying rules — the “greater of” comparison, the prepayment-reduction strategies, the open-mortgage exception, and the Interest Act’s semi-annual compounding basis — are sourced, at FCAC’s prepayment penalties briefing.
Sources
- Financial Consumer Agency of Canada — Prepayment penalties (briefing, House Standing Committee on Finance) — accessed 2026-09-21
- Financial Consumer Agency of Canada — Mortgage fees: reduce prepayment penalties — accessed 2026-09-21
- Financial Consumer Agency of Canada — Breaking your mortgage contract — accessed 2026-09-21
- Department of Justice Canada — Interest Act, R.S.C. 1985, c. I-15, Full Text — accessed 2026-09-21
- Financial Consumer Agency of Canada — Mortgage term and amortization — accessed 2026-09-21