Mortgage prepayment penalties in Canada: three months' interest or the IRD

The two ways a fixed-rate penalty is calculated

A prepayment penalty is the charge for breaking your contract before the term, the contract period, ends. FCAC describes two ways the penalty is usually worked out on a fixed-rate mortgage, with the higher one applying:

1. Three months' interest: three months of interest on what you owe, at your rate.
2. The interest rate differential (IRD): the gap between your rate and the lender's current rate for the time left in your term, applied to what you owe for that remaining time.

FCAC notes that lenders may use posted rates (the advertised rates) when they set the comparison rate, rather than the discounted rate many borrowers sign for. The choice of comparison rate can change the penalty a great deal, as our page on posted vs discounted rates explains. Your contract governs.

Penalties on variable-rate mortgages

On a variable-rate mortgage, the penalty is commonly three months' interest. Three months' interest on a variable rate is common practice, not a published rule (FCAC's page does not cover variable rates), so your contract is what counts.

The five-year rule in the Interest Act

Under section 10 of the federal Interest Act, when a mortgage's term runs more than five years, once five years have passed you can pay it off with three months' further interest and no more. The five-year rule does not apply to mortgages given by a corporation (source: Justice Laws website, Interest Act, current to September 30, 2026). A real-estate lawyer can confirm how the rule applies to your mortgage.

What a federally regulated lender must tell you about the penalty

The FCAC "Code of Conduct for Federally Regulated Financial Institutions — Mortgage Prepayment Information" (page dated September 24, 2025) applies to federally regulated lenders on mortgages where a prepayment charge could apply.

Under the Code of Conduct, a federally regulated lender gives you information every year on how the prepayment charge is calculated. For an IRD charge, the yearly information includes how the comparison rate is set.

On request, a federally regulated lender gives you a written statement of the prepayment charge and how it was calculated. The lender also provides prepayment calculators and a toll-free line to knowledgeable staff.

What the penalty rules do not cover

• Maturity. At the end of your term there is no prepayment penalty to renew, switch or pay off.
• Your yearly prepayment room. Paying extra within your contract's limits does not trigger a penalty; see prepayment privileges.
• Business mortgages. The Code does not cover business-purpose mortgages or borrowers who are not individuals.
• Credit unions. The Code applies to federally regulated lenders. If your mortgage is with an Ontario credit union, ask it directly how its charge is worked out.

Sources

• Financial Consumer Agency of Canada — Mortgage fees: Prepayment penalties, page dated 2025-10-15, checked 2026-10-26.
• Financial Consumer Agency of Canada — Code of Conduct for Federally Regulated Financial Institutions — Mortgage Prepayment Information, page dated 2025-09-24, checked 2026-10-26.
• Justice Laws website — Interest Act, section 10, current to 2026-09-30, checked 2026-10-26.

What to do next

To estimate your own penalty, try the penalty estimator; results are estimates only, not an offer or advice. If you are weighing a sale, refinance or early switch, start at Can your bank do better and we'll go through the numbers with you.