Mortgage prepayment penalties: IRD vs three months' interest
Break a closed fixed mortgage early and you usually pay the higher of three months' interest or the interest rate differential (IRD); break a closed variable one and it's three months' interest. The IRD is your rate minus a comparison rate, times the amount you prepay, times the years left. Big banks build the comparison rate from their posted rate minus the discount you got, which is why a $420,000 mortgage can cost $9,765 to break at a bank and $5,659 elsewhere.
The two formulas
| Mortgage | Penalty |
|---|---|
| Closed fixed | Higher of 3 months' interest or the IRD |
| Closed variable | 3 months' interest |
| Open | None |
Three months' interest = balance prepaid × your rate ÷ 12 × 3. IRD = (your rate − comparison rate) × balance prepaid × years left. The IRD only bites when rates have fallen since you signed, and it shrinks as your term runs down.
The posted-rate method
The comparison rate is where lenders differ. RBC uses its posted rate on the prepayment date for a term close to the time you have left, reduced by the rate reduction you got when you signed, and discounts the result to present value. TD describes the "similar mortgage rate" as the posted rate for a similar mortgage minus any discount you received. Many other lenders simply use their current rate for the remaining term.
Because posted rates sit far above what people actually pay (the typical big-bank posted 5-year rate is 6.19% against an average new 5-year fixed rate of 4.58%), subtracting your old discount from today's posted rate produces a low comparison rate and a large differential.
A worked example
$420,000 at 5.39% fixed, signed May 2024 on a 5-year term, 30 months left:
- Three months' interest: $5,659.
- Big-bank IRD: posted rate then about 6.84%, so the discount was 1.45%; today's posted rate for 30 months about 5.91%, minus 1.45% = 4.46%. IRD ≈ $9,765.
- Current-rate IRD at 5.31%: $840.
Posted rates here are the Bank of Canada's typical big-bank figures; the penalty calculator lets you enter your bank's own.
Ways to pay less
- Use your prepayment privilege first. Paying the yearly lump sum your contract allows before you break shrinks the balance the penalty applies to (FCAC).
- Port the mortgage if you're moving, instead of breaking it.
- Blend and extend: renew early with no prepayment penalty; FCAC says your lender must tell you how it calculates the new rate.
- Wait. The IRD falls each month as the time left falls. Our break-even calculator shows whether waiting for renewal beats breaking.
Other charges when you break
FCAC lists administration, appraisal, reinvestment and discharge fees, and a clawback of any cash-back you received when you signed. It also notes that a new lender may be willing to pay some or all of your costs.
Frequently asked questions
What is an interest rate differential (IRD)?
The interest your lender loses when you repay early: the difference between your rate and the rate it can lend at now for the time you have left, applied to the amount you prepay for the years left. TD calls the comparison rate the posted rate for a similar mortgage minus your discount.
Do variable-rate mortgages have an IRD?
Usually not. RBC and TD charge 3 months' interest to break a closed variable mortgage.
Is the mortgage penalty negotiable?
The formula is in your contract, but you can reduce it: use prepayment privileges first, port the mortgage, or blend and extend. Some new lenders contribute to costs to win your business.
Primary sources
- Financial Consumer Agency of Canada — Reduce mortgage prepayment penalties (3 months' interest or the IRD; posted-rate method; prepayment privileges; porting) (effective October 15, 2025). Checked .
- Financial Consumer Agency of Canada — Breaking your mortgage contract (fees, cash-back clawback, blend-and-extend) (effective October 15, 2025). Checked .
- RBC Royal Bank — Understanding mortgage prepayment charges (posted rate less your rate reduction; present value). Checked .
- TD — TD explains: what is an IRD? (posted rate for a similar mortgage minus your discount) (effective August 19, 2020). Checked .