Mortgage Penalties: What Breaking a Mortgage Actually Costs

Breaking a closed mortgage before your term ends — to refinance, sell without porting, or switch lenders — triggers a prepayment penalty. How that penalty is calculated depends on whether you have a variable or fixed rate mortgage, and the two methods can produce very different numbers.

Variable-rate mortgages are typically penalized at three months' interest — a relatively small, predictable amount calculated on your current balance and rate.

Fixed-rate mortgages are typically penalized at the greater of three months' interest, or the Interest Rate Differential (IRD) — which compares your original rate to the current rate for a term matching your remaining time, and can be substantially larger, especially if rates have fallen since you signed and you have several years left on your term.

Before breaking any mortgage, ask your lender for the exact penalty in writing — the IRD calculation involves lender-specific comparison rates that aren't always obvious from a rough online estimate, and the difference between an estimate and the real number can be significant.