Should You Break Your Mortgage Early?

Breaking your mortgage means ending your current term before it’s up and either switching to a new lender or renegotiating with your existing one. It always comes with a penalty, but sometimes that penalty pays for itself in savings.

How Mortgage Penalties Work in Canada

There are two types of penalties. Three-month interest is straightforward: three months’ worth of interest on your remaining balance. Interest Rate Differential (IRD) compensates the lender for the rate difference between your contract and current rates, multiplied by your remaining term.

The Big 6 “Discounted Rate” IRD Trick

This is the part most people don’t understand. The Big 6 banks (TD, RBC, BMO, Scotiabank, CIBC, National Bank) use a method called the Discounted Rate IRD. Here’s how it works:

When you signed your mortgage, the bank gave you a “discount” off their posted 5-year rate. For example, if the posted rate was 6.49% and your contract rate was 4.49%, your discount was 2.00%.

When calculating your IRD penalty, the bank takes the current posted rate for your remaining term and subtracts that same original discount. Since short-term posted rates are already much lower than 5-year posted rates, subtracting your large discount produces an artificially low “comparison rate,” which inflates your penalty dramatically.

Example: You have 3 years left. The current 3-year posted rate is 4.62%. Your original discount was 2.00%. So the bank’s comparison rate is 4.62% - 2.00% = 2.62%. If your contract rate is 4.49%, the differential is 4.49% - 2.62% = 1.87%. On a $300,000 balance, that’s $300,000 x 1.87% x 3 = $16,830 in penalties.

A monoline lender with the same contract rate would simply compare 4.49% to their current 3-year rate (say 3.94%), giving a differential of 0.55%, or $4,950 - a fraction of the Big 6 penalty.

This is one of the biggest reasons to work with a broker. The rate might look similar, but the penalty structure can save you tens of thousands of dollars if life changes.

What You Need to Calculate Your Penalty

For the most accurate Big 6 bank estimate, you’ll need your original discount off the posted rate. You can find this on your mortgage commitment letter or original paperwork. If you don’t have it handy, call your bank and ask: “What was my original discount off the posted rate?” They are required to tell you.

If you’re unsure, our tool will estimate it for you, but the exact number from your paperwork will always be more accurate.