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What Every Canadian Needs to Know About Fixed-Rate Mortgage Penalties

Most people don’t think about mortgage penalties when they sign their mortgage. Honestly, who reads the fine print? But those tiny words can cost you thousands of dollars if you ever need to break your mortgage early — and one out of every three Canadians does.

So let’s break this down in the easiest way possible.

What Is a Mortgage Penalty?

A mortgage penalty is a fee your lender charges you if you end your mortgage early.

This could happen if you:

  • Sell your home
  • Renew early
  • Refinance
  • Break the term for any reason

For fixed mortgages, the penalty is whichever is higher:

  1. Three months of interest, OR
  2. The Interest Rate Differential (IRD)

That’s just a fancy way of saying:

“How much money does the lender lose when you leave — and how can they charge you the most?”

Why This Matters

Depending on your lender, penalties on a $250,000 mortgage can range from $1,000 to over $10,000.

Same mortgage.
Same rate.
Totally different penalty.

It depends almost entirely on which lender you picked and how they calculate IRD.

The Three Types of IRD Penalties (Explained Like You’re 10)

Lenders use one of three methods. Some are fair. Some… not so much.

1. The Standard Method (The Fair One)

This is the good one. Many competitive lenders use this.

Here’s how it works:

  • They compare your mortgage rate to today’s rate for the time you have left.
  • If the difference is small, your penalty is small.
Example:
Your rate: 1.84%
Today’s 2-year fixed rate: 1.79%
Difference: basically nothing
→ Tiny penalty

With this method, you might pay around $1,150.

Not fun, but manageable.

2. The Discounted Method (The Big Banks’ Favourite)

This one is used by RBC, TD, Scotia, BMO, and National Bank.

This is where things get sneaky. Here’s what they do:

  • When you got your mortgage, you received a “discount” off their unrealistically high posted rate.
  • When you break your mortgage, they take that same discount and subtract it from today’s posted rate for the time you have left.
  • This makes the numbers look way worse… for you.
The result? A much bigger penalty.

Instead of that $1,150 example earlier, this method can easily jump to $7,000+. Oof.

3. The Posted-Rate Method (The “Grand Daddy” Worst One)

CIBC, this is you. This is the most expensive method, by far.

Here’s what they do:

  • They ignore your actual rate.
  • They compare posted rates from when you got the mortgage to posted rates today.
  • Posted rates are inflated, so the penalty becomes MASSIVE.

It’s not unusual to see penalties over $10,000–$15,000 with this method. Yes, seriously.

Why Do These Penalties Get So Huge?

Because many banks use formulas that benefit them, not you. And because most people don’t know any better until it’s too late.
Breaking a mortgage can cost lenders money — fair enough. But should it cost you thousands more just because of a tiny wording change in the fine print?

That’s where the problem is.

The Big Takeaway

When you choose a fixed-rate mortgage, the penalty rules matter just as much as the interest rate.

Before you sign, ask your mortgage broker (hi!) these questions:

1. What penalty method does this lender use?
2. If I break in 2–3 years, what could it cost me?
3. Is this lender known for high penalties?

Choosing the right lender could literally save you thousands of dollars in the future.

A Simple Rule of Thumb

  • Standard IRD = safer
  • Discounted IRD = expensive
  • Posted IRD = run away

Final Thoughts

Fixed mortgage penalties shouldn’t be a “gotcha” moment, but with some lenders, they absolutely are. Until the government forces clearer rules, the best protection you have is knowing how this stuff works before signing anything.

And now? You understand more than 90% of Canadian borrowers.