Breaking Your Mortgage

Borrowers contemplate breaking their mortgage as a result of personal financial circumstances changing, or at times when interest rates in the mortgage market begin decreasing. 

Breaking a mortgage with a financial institution or lender can be a costly process.  Lenders for the large part have different terms and conditions with their mortgages. In some cases with some lenders, breaking a mortgage is actually not possible.    With other lenders, there may be substantial penalties and fees.

Borrowers contemplating breaking their mortgage should obtain the following information:

  • Is there a penalty and if so, what is the amount of the penalty?
  • Does the lender charge an administration fee to break the mortgage?
  • Are there legal fees or disbursement fees to discharge the old existing mortgage?
  • Will there be legal fees or disbursement fees to register the new mortgage on the property?
  • If you received cash back as a feature on the mortgage, does it have to be paid back and what is the amount?
  • How is the penalty calculated? Is it 3 months interest or is the Interest Rate Differential (IRD)?

It is recommended that the above questions and answers are best to be written for the protection of both the lender and the borrower.  Note that the penalty amount can change on a day to day basis as a result of being based in some cases on current lending rates.  At times, it is possible to reduce the amount of the penalty by making a lump sum payment, if funds are available.  Important details on how the penalty is calculated is made available in the mortgage agreement.

INTEREST RATE DIFFERENTIAL (IRD) EXPLAINED

Financial institutions and lenders which allow borrowers to break mortgages often charge individuals the greater of the Interest Rate Differential (IRD) or a three month interest penalty.

Interest Rate Differential is an amount calculated based on the difference between two interest rates. Lenders will look at the interest rate on a borrower’s existing mortgage term.   In addition the lender will look at the current mortgage interest rate for a mortgage term that is similar to the remaining time on the existing mortgage.

As an example, if a borrower has two years left on a five-year term, the financial institution or lender would use the mortgage interest rate that it is offering currently for a two-year term to determine the second rate for comparison in the calculation.  In some cases, lenders will negotiate a discounted interest rate.  Lender may use the posted rate at the time an individual originally signed the mortgage agreement and compare this rate to the current rate for the term remaining.

Financial institutions and lenders are in the business of making money.  However in some circumstances, they will work with you in ways to reduce the prepayment charge. 

Calculation of Interest Rate Differential (IRD)

                   (B - C)

     A  x     __________      x   D

                12 months

A = Outstanding balance on mortgage

B = Annual interest rate on mortgage

C = Current market interest rate for the term closest to what is left on existing mortgage, rounding up or down

D = Number of months left until the end of term on existing mortgage

3 MONTHS INTEREST PENALTY EXPLAINED

Financial institutions and lenders which allow borrowers to break mortgages often charge individuals the greater of the Interest Rate Differential (IRD) or a three month interest penalty.

While the Interest Rate Differential is an amount calculated based on the difference between two interest rates, the three month interest penalty amount is simply three months interest on the outstanding amount on a borrower’s mortgage.  Lenders in some cases use arbitrary posted mortgage rates to calculate the three month interest penalty. Lenders do provide advance notice on how interest penalties are calculated, and this information is clearly available in the mortgage agreement one sign’s when the mortgage is originated.  How the calculations are made to break an existing mortgage is a lender’s own decision as there is no banking legislation in place that dictates how banks or lenders are to calculate breakage penalties. 

Individuals and borrowers comparing mortgage rates should also compare other features of the mortgages being presented.  As many Canadian’s break and/or refinance their mortgages, borrowers should ensure they understand the formula used for penalty calculations purposes. 

Financial institutions and lenders are in the business of making money.  However, in some circumstances, they will work with you in ways to reduce the prepayment charge.   Three month interest penalties can vary greatly from institution to institution.

Calculation of 3 Months Interest Penalty

                               B      

  A    X           _____________              × 3 months                 

                      12 months

A =  Outstanding balance on mortgage

B = Annual interest rate on mortgage

Mortgage Agent or Broker?

Your name could be here!



Best Mortgage Rates

Variable Rate 1.94%
1 Year 2.34%
2 Year 2.14%
3 Year 2.44%
4 Year 2.49%
5 Year 2.49%
10 Year 3.84%

April 27, 2017

Use our mortgage calculators to find out your mortgage payments

Mortgage Calculators


Our sponsors
TorVest Logo Century21 Regal Reality Logo Premier Planning Logo RAM Contracting Logo
RateSave Canada AppRateSave Canada App