1 Mortgage Details
2 Current Rate & IRD Method
3 Break-Even & Options
📊 Penalty Comparison Table▼
| Penalty Type | Applies To | Formula |
|---|---|---|
| 3 Months' Interest | Variable + Fixed | (Rate / 12) × Balance × 3 |
| Standard IRD | Fixed only | Balance × (YourRate − CurrentRate) × (Months / 12) |
| Discounted IRD | Fixed only (Big Banks) | Balance × (AdjYourRate − AdjCurrentRate) × (Months / 12) |
Fixed rate mortgages pay the GREATER of 3 months' interest OR IRD. Variable rate mortgages always pay 3 months' interest.
🔄 Blend-and-Extend Explained▼
What is it?
Blend-and-extend allows you to combine your current rate with a new rate for a longer term. This avoids the prepayment penalty. You may pay administrative fees.
Formula
Worked Example
Your rate: 5.50%, Remaining: 24 months, New rate: 4.00%, New term: 60 months
When to Use
- When prepayment penalty is high
- When you want to stay with your current lender
- When current rates are lower than your existing rate
📖 Standard IRD vs. Discounted IRD▼
Standard IRD (Monoline Lenders)
Uses your actual contract rate vs. the current rate for a similar remaining term.
Simpler, more transparent, and typically produces lower penalties.
Discounted IRD (Major Banks)
Uses posted rates and applies discounts:
Why Big Bank Penalties Are Higher
Short-term posted rates (1-2 year terms) often have very small discounts. So AdjustedCurrentRate stays close to the posted rate, while your AdjustedYourRate reflects the large discount you received. The difference creates a much larger IRD — often 3–4× higher than Standard IRD.
Example Comparison
Balance: $300,000; Your rate: 5.50%; Current rate: 4.00%; Remaining: 24 months
Exact results depend on your lender's specific posted rates and discounts. The Discounted IRD method penalizes borrowers who received large discounts when signing.
4 Frequently Asked Questions
How is a mortgage prepayment penalty calculated in Canada?
For variable-rate mortgages, the penalty is 3 months' interest. For fixed-rate mortgages, it's the greater of 3 months' interest or the Interest Rate Differential (IRD).
What is the Interest Rate Differential (IRD)?
The IRD is the difference between your original interest rate and the current rate for a term matching your remaining months. It represents the interest your lender loses when you break the mortgage early.
What is the difference between Standard and Discounted IRD?
Standard IRD uses your actual rate vs. the current rate for a similar term. Discounted IRD (used by major banks) uses posted rates and discounts, often producing penalties 3–4× higher than Standard IRD.
What is blend-and-extend?
Blend-and-extend combines your current rate with a new rate to create a blended rate for a longer term. This avoids prepayment penalties.
When is it worth breaking my mortgage?
It's worth breaking if the interest savings over your remaining term exceed the prepayment penalty plus any fees. Use our break-even analysis to determine this.
Can I avoid the penalty?
Yes. Options include: choosing blend-and-extend, waiting until your term ends, using your prepayment privileges first, or porting your mortgage if you're buying a new home.
5 Official Resources
Verify all calculations with your lender before making any decisions.
⚠️This tool is for information purpose only. We do not guarantee any claim.
It is made based on data publicaly available on official website of concerned department.
Last Updated: March 2026 | Official Determination Required