Thinking of Breaking Your Mortgage? Understand the Penalty First

Maybe rates dropped, maybe you’re selling, maybe you need to refinance. Whatever the reason, breaking your mortgage before the term ends usually comes with a penalty — and knowing that number before you act can save you thousands.

The two ways penalties are calculated

On a variable rate, the penalty is almost always three months’ interest — usually modest and easy to predict. On a fixed rate, you pay the greater of three months’ interest or the interest rate differential (IRD), which can be much larger depending on your rate and how much time is left.

What the IRD really is

The IRD roughly compensates the lender for the interest they’ll miss out on by letting you leave early. The bigger the gap between your rate and current rates, and the more time left on your term, the bigger it gets. On a fixed mortgage, this is where the painful surprises happen.

When breaking still makes sense

If you’re consolidating expensive debt, locking in meaningful long-term savings, or the move is unavoidable, the penalty can be well worth paying — sometimes it can even be rolled into the new mortgage. The only way to know is to run it.

Ways to soften the blow

Porting your mortgage to a new home, using your annual prepayment privileges first, or timing the break near renewal can all reduce what you pay. Small strategy tweaks can make a big difference.

Get your real penalty number

Send me your lender and mortgage details and I’ll estimate your penalty and show you whether breaking now comes out ahead — before you commit to anything.

Tyler Salmon — Mortgage Agent Level 2 (Ontario & Alberta), License #M21003803. This post is general info, not advice — every file is different, so let’s talk yours through.

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