Why a penalty exists
The lender funded itself for the length of the term on the basis of expected interest. Repaying before maturity breaks that calculation, and the contract provides compensation. It is not a punishment: it is a clause you signed.
Method one: three months’ interest
The simplest: the balance times the rate, divided by four. It generally applies to variable-rate mortgages, and to fixed ones when the differential calculation yields less.
Method two: the interest rate differential
The lender compares your rate with what it could get today for the remaining term, and charges you the gap over that period. When rates have fallen since signing, this figure far exceeds three months’ interest.
The role of the posted rate
Many lenders compute the differential from their posted rates rather than rates actually granted, factoring in the discount you received. Two lenders, same balance, same contract rate: the penalties can differ twofold.
What avoids or reduces it
A portability clause lets you carry the mortgage to a new property; a buyer can sometimes assume your loan; prepayment privileges let you cut the balance before breaking. Some mortgages allow a penalty-free payout on specific terms.
Ask for it in writing
You are entitled to a detailed calculation, with the method used and the figures behind it. Demand it before signing anything elsewhere: a misjudged penalty alone can wipe out the gain from refinancing.
Before breaking, do the arithmetic
Compare the penalty and fees with the expected gain over the remaining term. A broker runs that calculation up front; this is precisely the kind of decision where instinct misleads.
No rate, price, or recommendation on this page. Amounts and limits change: verify them with official sources before deciding.