Posted vs discounted rate: why does it change my penalty?

In Canada, many lenders work out the interest rate differential (IRD) penalty on a fixed mortgage from posted rates and the discount you received. The posted-rate method can produce a much larger penalty than a simple rate comparison would suggest. The posted rate is the lender's advertised rate; the discounted rate is the lower rate you signed for.

The posted rate and the discounted rate

A lender's posted rate is its published rate for a given term. Many borrowers do not pay the posted rate. The rate in your contract is usually the posted rate minus a discount, and that discounted rate is what sets your payment.

The gap matters only if you break the mortgage before the end of your term, the length of your contract. Then the lender charges a prepayment penalty, and the way the lender picks the comparison rate decides how big that penalty is.

How the penalty is set

According to the Financial Consumer Agency of Canada (checked October 2026), the penalty on a fixed mortgage is usually the higher of three months' interest or the IRD. The IRD compares your rate with the lender's current rate for the time left in your term, and lenders may use posted rates to do it. Your mortgage contract is what governs.

Many lenders that use posted rates start with today's posted rate for a term close to your remaining term. Those lenders subtract the discount you got when you signed, then compare the result with your rate. Because the discount comes off today's posted rate, the comparison rate can land well below anything you would be offered. The lower the comparison rate, the wider the gap and the larger the penalty.

Other lenders compare your rate with a rate they would offer today without that step. The wording in your contract tells you which method applies.

A worked example of the two IRD methods

These figures use illustrative rates only, not quotes, and a simplified calculation; your lender's method may differ.

You owe $400,000 on a fixed mortgage with three years left. Your contract rate is an illustrative 4.5%, which was the lender's posted rate of an illustrative 6% minus a 1.5-point discount.

1. Three months' interest: $400,000 × 4.5% ÷ 4 = about $4,500.
2. IRD using a rate offered today: if the lender compared with an illustrative 4% three-year rate, the gap is 0.5 points. $400,000 × 0.5% × 3 years = about $6,000.
3. IRD using posted rate minus your original discount: if today's posted three-year rate is an illustrative 5%, the comparison rate is 5% minus 1.5, or 3.5%. The gap is 1 point. $400,000 × 1% × 3 years = about $12,000.

Same mortgage, same day: the method alone doubles the IRD in this example.

Longer terms and the five-year rule

Section 10 of the federal Interest Act covers mortgage terms longer than five years. Once five years have passed, you can pay such a mortgage off with no more than three months' further interest. The five-year rule does not apply to mortgages given by a corporation (source: Justice Laws, current to September 30, 2026). A lawyer can confirm how the rule applies to your mortgage.

What to do next

Before you sign a new mortgage, ask how its penalty is calculated; the penalty method matters if you might sell or refinance early. To estimate your current penalty, try the penalty estimator; results are estimates only, not an offer or advice. Or use our call-me-back form and we will go through your payout statement with you.