- Variable closed mortgages: usually 3 months’ interest.
- Fixed closed mortgages: usually the greater of 3 months’ interest and the interest rate differential (IRD).
- RBC, TD, Scotiabank and CIBC describe an IRD based on posted rates adjusted for your original discount; National Bank states a different formula, and many other lenders use their current rate.
- For terms over five years, the Interest Act limits the penalty to 3 months’ interest after the fifth anniversary (except mortgages given by a corporation).
The two formulas
FCAC explains that the penalty is usually the higher of three months’ interest on the amount you prepay and the interest rate differential, and that the IRD is usually used when your rate is higher than the current rate and you signed less than five years ago.
- 3 months’ interest = balance × your rate × 3/12.
- IRD = balance × (your rate − comparison rate) × months remaining / 12.
FCAC’s example: $200,000 at 6%, 36 months left, and a 4% rate for a 36-month term. Three months’ interest is $3,000; the IRD is $12,000; the penalty is $12,000.
Posted-rate vs contract-rate IRD
What makes IRDs differ is the comparison rate. RBC, TD, Scotiabank and CIBC describe comparing your rate with their posted rate for a term close to your remaining term, adjusted for the discount you got when you signed (CIBC adds the discount to your rate; the others subtract it from the posted rate, which comes to the same gap). National Bank states the higher of 3 months’ interest or 1 month’s interest (max. $500) plus the interest differential, and BMO’s formula was not on the pages we could read. Many monoline lenders compare against their current offered rate instead. When posted rates sit far above offered rates, the posted-rate method produces a lower comparison rate, a wider gap and a bigger penalty.
| Bank | Penalty method, in the bank’s words |
|---|---|
| RBC Royal Bank | Greater of 3 months’ interest or IRD vs RBC’s posted rate for a similar term, less your rate reduction. Variable: 3 months’ interest. |
| TD Canada Trust | Higher of 3 months’ interest or IRD using TD’s posted rate for a similar mortgage minus your discount. Variable: 3 months’ interest. |
| Scotiabank | Greater of 3 months’ interest or IRD vs Scotiabank’s posted rate for the closest term, less your discount. Variable: 3 months’ interest. |
| BMO Bank of Montreal | See BMO’s prepayment calculator and prepayment-options PDF (formula not on the pages we could read). |
| CIBC | Greater of 3 months’ interest (at your rate + discount) or IRD vs CIBC’s current posted rate. Variable: 3 months’ interest at CIBC Prime. |
| National Bank | Higher of 3 months’ interest or 1 month’s interest (max $500) plus the interest differential. Variable: 3 months’ interest. |
Your lender must tell you how it calculates the penalty
Under the Financial Consumer Protection Framework Regulations, a bank’s mortgage agreement must open with an information box that includes the prepayment penalty and a brief explanation of how it is calculated. FCAC says your lender must tell you how it calculates the penalty. Ask for a written payout statement before you decide.
How to pay less
- Use your annual prepayment privilege first; the penalty is then charged on a smaller balance (privileges by bank are in the comparison).
- Port the mortgage to your next home instead of breaking it (see portability).
- Ask about blend-and-extend: FCAC describes it as an early renewal where the lender blends your old rate with the new term’s rate.
- Wait: fewer months remaining means a smaller IRD, and at maturity there is no penalty.
- If your term is longer than five years, after the fifth anniversary the Interest Act (s.10) caps the penalty at 3 months’ interest for mortgages not given by a corporation.
Rules change. Every figure on this page links to the official source and shows when we checked it. If something looks out of date, tell us and we will re-check.
Frequently asked questions
Does a variable mortgage ever have an IRD?
RBC, TD, Scotiabank, CIBC and National Bank all describe a 3 months’ interest penalty for closed variable mortgages (CIBC calculates it at CIBC Prime). Check your own contract.
Is the cash back clawed back if I break?
Cash-back mortgages often require you to repay some or all of the cash back if you end the term early. It is in the contract.
Is the IRD charged if rates have gone up?
If the comparison rate is above your rate, the IRD is zero and you pay 3 months’ interest.
Sources
- Reduce or avoid prepayment penalties — FCAC, checked Oct 31, 2026
- Breaking your mortgage contract (blend-and-extend, changing lenders) — FCAC, checked Oct 31, 2026
- Financial Consumer Protection Framework Regulations (SOR/2021-181) — Justice Laws, checked Oct 31, 2026
- Interest Act (R.S.C. 1985, c. I-15), ss. 6 and 10 — Justice Laws, checked Oct 31, 2026
Educational information only, not financial, legal or tax advice. BankMortgages.ca is independent and is not affiliated with, endorsed by or paid by any bank named on this site. Bank terms change: confirm every rate and term with the lender and the official sources linked on each page before you act. Read the full disclaimer.