Mortgage Penalty Calculator

Are you considering refinancing the terms of your mortgage, paying off your loan early, or transferring your mortgage to a new purchase? Whatever the reason, breaking your mortgage terms will likely result in a penalty. Use our Mortgage Penalty Calculator to help you determine what it will cost you to break your mortgage.


This calculator is for illustrative purposes only. While every effort is made to keep this tool up-to-date, Simple Mortgage does not guarantee the accuracy, reliability or completeness of any information or calculations provided by this calculator. Simple Mortgage is not be liable for loss or damage of any kind arising from the use of this tool.

What does it mean to break
a mortgage?

Breaking a mortgage simply means you’re ending your mortgage before the contract term is up. There are many reasons to break a mortgage. For example, you might be in the middle of a 5-year fixed-rate mortgage, but interest rates have dropped considerably. You can break your mortgage and a get a new one with a lower interest rate, but that would mean you’d have penalties to pay.

Or maybe you came into a large sum of money and you want to pay your mortgage off early. Other common reasons for breaking a mortgage include, refinancing to get rid of credit card debt, needing to increase your amortization period to reduce your payments, or buying a new home and needing to transfer your mortgage to the new purchase.

What is the difference between an open-and closed-term mortgage?

Open-and closed-term mortgages differ in the penalties that are associated with breaking them. If you have an open-term mortgage, there are no prepayment penalties associated with paying your loan off early. The payoff is that these mortgages tend to have higher interest rates.

With a closed-term mortgage, you are penalized if you choose to pay your mortgage off early, but you can enjoy lower interest rates. In Canada, a standard closed-term mortgage is 5 years.

Some closed-term loans allow the borrower to pay off 10%-20% of the principle once a year without penalty.

How much does it cost to break a mortgage?

There is no cut and dry answer to this as every contract
is different, however the most substantial cost is the
prepayment penalty, which differs by lender. It is
important to review the decision to break a mortgage with a mortgage broker so that you can understand and be guided to make the right decision for you. Having said that, there are generally two main methods used to
calculate a penalty.

3-months of Interest

Many penalties for breaking a variable rate mortgage are calculated by adding up 3 months of interest on the remaining principal of the mortgage at the current interest rate. This method is also used on fixed rate mortgages when the 3-month interest total is greater than the total calculated in Method 2 below.


Interest Rate Differential (IRD)

On a fixed-rate mortgage, the penalty is usually the greater amount between Method 1 and Method 2. For Method 2, the interest you owe is calculated in two different ways and then the Interest Rate Differential (IRD) is the difference between them.

First, the interest owed is calculated at the
non-discounted rate of interest that was current when you signed your contract (this may differ from what you are paying because you might have gotten a discount).

The second is the current fixed interest rate they are offering for a term that would cover the remainder of your mortgage (if you have 2 years left on your mortgage, they will look at their 2-year term rates). They will take the difference of those two rates and divide it by 12 to get the monthly interest rate. Then, they will multiply it by the number of months left in your term, and then multiply that by your principal amount. As you can see, the penalties can be quite steep, so you’ll need to weigh your options to make sure breaking your mortgage makes sense. We are here to help you come to the best decision for your situation.

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