How are penalties determined if you break your mortgage before the term is up?

Financial institutions generally charge the higher of the following two amounts:

  • Three months of interest on your existing mortgage*
  • Interest rate differential

Basically, the financial institution does a calculation that looks like this:

Penalties calculation

Outstanding mortgage × (Your interest rate – Current interest rate*) × Remaining term for your loan

*Other interest rates are sometimes used. Check what rates are used in the calculation as they have a major effect on the penalty to be paid. For example, if the financial institution gave you a rate discount of 1% and adds it in the above calculations, you could end up paying much more than you expected.


Before choosing your mortgage lender, find out about the penalties charged for breaking your mortgage loan before the term is up. These penalties can run in the thousands of dollars.

You could ask your financial institution to calculate the penalty it would charge if you were to break your mortgage after two years assuming 1% decrease in the market rates.

End of the warning

If you were reimbursed for fees or got cash back upon signing the agreement (e.g., payment of notary fees), these amounts may be considered in calculating the penalty.