TL;DR
Before you break a mortgage, run one decision test: net benefit after penalty and fees. If that number is weak or uncertain, preserve flexibility first.
What triggers a mortgage penalty
FCAC explains that a prepayment penalty can apply when you break your contract, transfer lenders before maturity, prepay above your allowed privilege, or pay out the mortgage early when selling.
Open mortgages generally allow prepayment without penalty, while closed mortgages often charge one.
Three-month interest vs IRD: where most confusion happens
| Contract type | Common penalty method | Why cost can vary |
|---|---|---|
| Variable-rate closed mortgage | Often around three months' interest | Balance and current contract rate still matter; lender admin fees may apply. |
| Fixed-rate closed mortgage | Usually greater of three months' interest or IRD | IRD method can differ by lender and can materially increase break cost. |
| Open mortgage | Typically no prepayment penalty | Rate is usually higher, so flexibility is bought upfront. |
FCAC notes that for mortgages where IRD may apply, lenders should disclose the comparison rate used and where borrowers can find it. That detail matters because lender formulas are not identical in practice.
Why lender formulas change your real number
Two borrowers can both have fixed rates and still get very different penalties if their lenders use different comparison-rate logic, discount treatment, or term-matching assumptions.
Request these inputs in writing before you decide
- outstanding balance used in the calculation
- contract rate and any discount assumptions
- comparison rate and how remaining term is matched
- administration and discharge fees beyond the penalty itself
Break-even test: the decision formula that prevents costly mistakes
Net benefit = projected interest savings - penalty - switching costs.
If net benefit is thin, uncertain, or only works under perfect assumptions, you are not ready to break.
Use conservative assumptions for hold period, legal fees, appraisal, setup costs, and rate-path uncertainty. Then rerun the same test under a less favorable scenario.
Alternatives framework before breaking
Borrowers usually have more than two choices. Compare these four paths before committing:
- Stay until maturity: avoid near-term penalty and preserve optionality for renewal.
- Blend-and-extend discussion: negotiate with current lender when available.
- Straight switch at renewal: compare transfer offers before accepting default renewal.
- Refinance now: proceed only when net benefit remains strong after full costs.
Decision psychology: traps that inflate break costs
- Anchoring: fixating on one advertised rate instead of net-cost math.
- Loss aversion: avoiding the penalty conversation until options narrow.
- Default effect: accepting an auto-renewal without a proper switch comparison.
- Present bias: chasing immediate payment relief while creating longer-term friction.
Countermove: use one written scorecard for total cost, monthly resilience, and flexibility.
120-60-30 day prepayment planning timeline
120 days out
get your actual payout statement and current penalty estimate from your lender.
60 days out
run side-by-side options (stay, switch, refinance) with conservative break-even assumptions.
30 days out
choose one execution path and lock legal/funding tasks so timing does not erode the economics.
Best next step
Start by replacing guesswork with hard numbers from your lender and your own break-even model.
