Mortgage Penalty Calculator (IRD)
Thinking of breaking your mortgage? Your lender will charge the greater of three months' interest or the Interest Rate Differential (IRD) — and how they calculate IRD can change the number by thousands. Estimate both, including the posted-rate method the big banks use.
How the penalty is calculated
For a closed fixed-rate mortgage, Canadian lenders charge the greater of two amounts. For a closed variable-rate mortgage, the penalty is typically three months' interest only:
3 months' interest ≈ balance × your rate ⁄ 4
IRD ≈ balance × (your rate − comparison rate) × months remaining ⁄ 12
penalty (fixed, closed) = max(3 months' interest, IRD)
Everything hinges on the comparison rate. Lenders that compare against their actual current rate for your remaining term produce moderate penalties. The major banks instead use a posted-rate method: today's posted rate for a similar term minus the discount you originally negotiated. Because original discounts often run 1.5–2 points, the comparison rate collapses — and the IRD balloons. Same mortgage, radically different penalty.
These are close estimates, not quotes. Lenders apply day-count conventions, use your exact balance on the discharge date, and round differently — but this math will land within a few percent of a written quote, which is what you need to decide whether breaking is even worth investigating.
Worked example: same mortgage, two methods
A homeowner with $400,000 remaining at 5.50% and 30 months left in the term wants out. The lender's current 2–3 year rate is 4.20%; the posted rate is 5.89% and the original discount was 1.99%:
| Line | | Amount |
|---|
| 3 months' interest | $400,000 × 5.50% ÷ 4 | $5,500 |
| IRD — market comparison | vs 4.20%, 30 months | $13,000 |
| IRD — posted-rate method | vs 5.89% − 1.99% = 3.90% | $16,000 |
| Penalty range | greater of 3-month vs IRD | $13,000 – $16,000 |
The method alone moves this penalty by $3,000. This is why the single most valuable phone call before breaking a mortgage is asking your lender which comparison rate they use — and why homeowners who locked in low 2021 rates often face only the three-month minimum, since today's comparison rates sit above their contract rate and the IRD falls to zero.
Breaking-your-mortgage questions, answered
How is a mortgage penalty calculated in Canada?
Closed fixed-rate: the greater of three months' interest or the IRD. Closed variable-rate: typically three months' interest only. Three months' interest ≈ balance × rate ÷ 4; IRD ≈ balance × rate difference × months remaining ÷ 12.
Why is my bank's quote so much higher than a simple estimate?
Major banks use the posted-rate method: today's posted rate for your remaining term minus your original discount. Discounts of 1.5–2 points crush the comparison rate and inflate the IRD. Monolines and many credit unions compare against actual current rates, which yields smaller penalties.
Is it worth breaking my mortgage for a lower rate?
Compare penalty + fees against interest saved: savings ≈ balance × rate reduction × remaining months ÷ 12. Break only if savings clear the penalty with margin. Also ask about blend-and-extend, which mixes old and new rates without the full penalty.
Can I reduce or avoid the penalty?
Use your annual prepayment privilege (often 10–20% of original principal) just before breaking to shrink the balance; port the mortgage to your next property; wait closer to renewal since IRD shrinks with the remaining term; or break exactly at renewal, when no penalty applies.
Is the penalty tax-deductible?
For a principal residence, generally no. For rental or investment property it may be deductible or added to the cost base depending on circumstances — confirm with an accountant.
How do I get my exact number?
Federally regulated lenders must provide penalty calculators and explain their method. Pull your exact balance and rate from online banking, then request a written penalty quote. Use this page to sanity-check what they tell you.
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