Estimate the cost of breaking your mortgage early. Compare 3-month interest penalty vs Interest Rate Differential (IRD) to see what you'll pay.
Two Penalty Types
IRD vs 3-month interest
Greater of Both
Lenders charge higher amount
Estimate Only
Contact lender for exact amount
The lender's current posted rate for a term matching your remaining months
Fixed rate mortgages use the greater of IRD or 3-month interest
3-Month Interest Penalty
Balance × Rate × 3/12
$5,500
Interest Rate Differential (IRD)
Balance × Rate Diff × Months/12
$10,000
Rate difference: 1.00% | Applied over 36 months
Your Estimated Penalty
Based on IRD (the greater of the two)
*This is an estimate. Contact your lender for exact penalty amount.
The simpler calculation. You pay three months of interest on your remaining balance.
Formula: Balance × Interest Rate × (3 ÷ 12)
Example: $400,000 × 5.5% × 0.25 = $5,500
The more complex calculation. Based on the difference between your rate and current rates.
Formula: Balance × (Your Rate - Current Rate) × (Months ÷ 12)
Example: $400,000 × 1% × 3 = $12,000
The IRD penalty can be substantial when interest rates have dropped since you took out your mortgage. Banks use different methods to calculate IRD, and some use "posted rates" while others use "discounted rates" – leading to vastly different penalties.
For example, if you have a 5.5% mortgage and current rates for your remaining term are 4.5%, the 1% difference applied over 3 years can result in a penalty of $12,000 or more on a $400,000 balance.
Important: Each lender calculates IRD differently. Some use posted rates, others use discounted rates. Always contact your lender for an official payout statement before making decisions.
If you're close to renewal, waiting a few months can save thousands in penalties.
Make your 15-20% annual prepayment before breaking to reduce the balance penalties are calculated on.
If moving, porting your mortgage to the new property can avoid penalties entirely.
Some lenders offer to blend your current rate with new rates and extend your term without penalties.
Let us help you run the numbers and find out if refinancing saves you money.
Free tools our clients use most often alongside this one.
Lender IRD formulas vary — the calculator estimates, but the exact penalty comes from your lender. We'll pull it for you and show whether refinancing still saves you money. Free, no credit check.
For fixed-rate mortgages, the penalty is the greater of: (1) 3 months' interest on your current balance, or (2) the Interest Rate Differential (IRD) — the difference between your contract rate and the lender's current rate for your remaining term, applied to your balance. Variable-rate penalties are always 3 months' interest.
IRD measures the difference between your mortgage rate and the lender's current posted or comparison rate for a term matching your remaining term. For example, if you have 3 years left at 5.5% and the lender's current 3-year rate is 4.5%, the IRD is 1.0%. Some lenders use posted rates (higher penalty) while others use discounted rates.
Fixed-rate mortgages use the IRD calculation, which can result in penalties of $10,000-$30,000+ when rates have dropped significantly since you locked in. Variable-rate mortgages always use the simpler 3-months' interest calculation, making penalties much more predictable and usually $3,000-$5,000.
Most mortgages allow 15-20% annual lump-sum prepayments without penalty. By making your maximum prepayment before breaking the mortgage, you reduce the balance the penalty is calculated on. Also, waiting until closer to renewal reduces the remaining term, lowering the IRD.
Compare the penalty cost against the interest savings for your remaining term. If the savings exceed the penalty, it's worth breaking. Generally, if you can save 0.50%+ on rate with more than 2 years remaining, it's worth calculating. Our Refinance Calculator can help with this analysis.
Breaking your mortgage may make sense if the interest savings from a lower rate exceed the penalty cost, if you need to access equity for debt consolidation, or if you're selling your home and can't port the mortgage.
High penalties typically occur when you have a fixed-rate mortgage and rates have dropped since you signed. The IRD calculation compensates the lender for the interest they'll lose by lending the money at today's lower rates.
No, and this is a major issue. Some lenders use posted rates (higher = bigger penalty), while others use discounted rates (lower = smaller penalty). Big banks often use posted rates, resulting in much higher penalties than monoline lenders.
Yes, in most cases you can add the penalty to your new mortgage if you have enough equity. However, this means you'll pay interest on the penalty amount over the life of your new mortgage.
Variable-rate mortgages typically only have a 3-month interest penalty, regardless of when you break. This makes them much more flexible and cheaper to exit than fixed-rate mortgages with IRD penalties.
Pick a time that works best for you
