Breaking Your Mortgage in 2027: Penalties, IRD and When It Pays

By Jatin Dua · Broker of Record, RE/MAX Quantum Realty · Updated 2 November 2026 · 9 min read — How mortgage penalties work in 2027, why the fall 2026 rate rise shrinks many IRDs, two worked examples and a simple test for when breaking pays.

This guide is for Ontario homeowners who may sell, move, refinance or switch lenders before their mortgage term ends in 2027. You will learn how the penalty is worked out, why the fall 2026 rate rise changes the maths, two worked examples, and a simple test for when breaking actually pays, as of November 2026.

How much does it cost to break a mortgage in 2027?

It depends on your mortgage type. According to FCAC, the federal financial consumer agency, the penalty on a closed fixed-rate mortgage is usually the higher of three months’ interest or the interest rate differential (IRD). On a closed variable-rate mortgage, lenders such as TD typically charge three months’ interest only. An open mortgage has no prepayment penalty, but its rate is higher.

FCAC says you can face a penalty when you:

• pay off the whole mortgage before the term ends, including when you sell;
• break the contract to refinance or change your rate;
• transfer the mortgage to another lender before maturity;
• prepay more than your contract allows.

Lenders may add an administration fee, and there is usually a separate discharge fee. My guide to mortgage discharge fees in Ontario covers that part.

How is the interest rate differential calculated?

The IRD tries to measure the interest the lender loses because you leave early. FCAC describes it this way: the lender works out the interest left in your term at two rates, and the difference between the two totals is the IRD. The first rate is your contract rate. The second is a current rate for a term close to the time you have left, and at many lenders that is the posted rate minus the discount you got when you signed.

FCAC gives an example: a $200,000 balance at 6%, 36 months left, and a current posted rate of 4%. Three months’ interest is about $3,000, but the IRD is about $12,000, so the penalty is $12,000.

The “minus your original discount” step is the one that surprises people. The bigger the discount you negotiated, the lower the comparison rate and the larger the IRD. My guide to how lenders calculate IRD shows which lenders use which method, from their own published pages.

Why does the 2026 rate rise change your penalty?

The IRD is large when today’s rates are well below your contract rate, and small or zero when today’s rates are close to or above it. Rates went up this fall. The Bank of Canada raised its policy rate to 2.50% on 28 October 2026, and the big banks’ posted rates moved up too.

Source: Bank of Canada, posted interest rates offered by the six major chartered banks (weekly series). Posted rates are list rates; most borrowers pay less.

What this means in plain terms: if you signed in 2025 or 2026, your rate is probably close to what lenders charge now, so your penalty is likely to be three months’ interest. If you signed in 2023, when rates peaked, your contract rate is probably well above today’s comparison rate, and the IRD can be much larger.

What would my penalty be? Two 2027 examples

Both examples are hypothetical and use the posted-minus-discount method with a simplified formula: rate gap times balance times months left divided by 12. The Bank of Canada publishes posted rates for one, three and five years, so I used the closest one. Your lender’s figure will differ.

Source: my calculations using Bank of Canada posted rates (weeks of 4 October 2023, 14 May 2025 and 4 November 2026) and the method described by FCAC and TD. Discounts are assumptions.

The 2023 borrower pays nearly twice as much even with a smaller balance, because of the rate gap. If posted rates fall in 2027, both IRD figures would grow. If they rise further, they shrink.

When does it pay to break your mortgage?

Breaking only makes sense when what you gain is clearly more than the penalty plus fees. Here are the common cases.

You are selling and buying another home

Ask about porting first. Porting moves your existing rate, balance and terms to the new home, and TD notes it avoids the prepayment charge. If you need to borrow more, ask how the extra money will be priced. On an insured mortgage, CMHC charges a separate premium on the increase only. Ask whether there is a time limit between the sale and the purchase, and get it in writing. See my guide to porting your mortgage.

You are selling and not buying

The penalty is usually unavoidable, so build it into your net proceeds before you list. My guide to what happens to your mortgage when you sell walks through the payout.

You want a lower rate

In 2027 this rarely pays, because rates have risen. Take example B. Refinancing from 5.54% to an illustrative 4.69% saves roughly $7,400 of interest over the 21 months left, while the penalty is about $13,600 before legal and discharge costs. Also, FCAC notes that refinancing means passing the stress test again.

You need to borrow against your equity

Compare a refinance with a home equity line of credit added on top, which may not require breaking the first mortgage at all. My guide to HELOC vs refinance compares the two.

How can you reduce or avoid a mortgage penalty?

• Use your prepayment privilege first. FCAC suggests making your allowed lump-sum payment before you break, which lowers the balance the penalty is based on. Some lenders restrict prepayments close to the break date, so ask.
• Time it near maturity. TD, for example, lets you renew up to 120 days before maturity without a charge. If your term ends in early 2027, a short wait may cost less than the penalty.
• Port instead of breaking when you move.
• Ask the new lender. When you switch, ask any competing lender whether it will help with the switching costs before you commit.
• Get the payout statement in writing, with the comparison rate and any discount shown.

Does the Interest Act cap penalties after five years?

Only in a narrow case. Section 10 of the federal Interest Act says that if a mortgage term is longer than five years, then once five years have passed you can pay it off with no more than three months’ extra interest. It does not help on a standard five-year term, and it does not apply to mortgages given by corporations. If you hold a seven- or ten-year term past its fifth year, this protection matters.

Is a variable-rate mortgage cheaper to break?

Usually, yes. Closed variable mortgages typically charge three months’ interest with no IRD. On a $500,000 balance at an illustrative variable rate of 4.20%, that is $5,250. Variable rates rose by 0.25 points after the October 2026 hike, which nudges that penalty up slightly. If you think you may move within a few years, that flexibility is worth weighing when you choose. My guide on whether to lock in a variable mortgage covers the trade-off, including the fact that converting to fixed can carry a higher future penalty.

Will mortgage penalty rules change in 2027?

Not yet. Budget 2026 announced only that the government intends to consult industry and others on making prepayment penalties for insured mortgages easier to understand and compare. No new rule, formula or start date has been set as of 10 November 2026. Today, FCAC says federally regulated lenders must explain in your mortgage agreement how the penalty is calculated, in clear and simple language. Read that box before you sign, not when you want to leave.

What to do next

1. Find your contract rate, your original discount if any, and your maturity date.
2. Ask your lender for a written penalty estimate showing the comparison rate used.
3. Use any unused prepayment privilege before you break, if your lender allows it.
4. If you are moving, ask about porting and the time limit in writing.
5. Compare the penalty with the real savings, and confirm with a licensed mortgage professional. This article is general information, not financial advice.

Frequently asked questions

Sources

• FCAC — Prepayment penalties and how to reduce them
• FCAC — Preparing to get a mortgage (stress test on refinancing)
• Interest Act (R.S.C. 1985, c. I-15), section 10
• Bank of Canada — Posted interest rates offered by chartered banks
• Bank of Canada — Policy rate decision, 28 October 2026
• TD — What happens if you break your mortgage
• CMHC — Mortgage loan insurance cost (portability premium on increase)
• Budget 2026 — Chapter 3 (prepayment penalty consultation)

Related reading

• The Bank of Canada Raised Rates: What It Means for GTA Buyers, Sellers and Owners
• Variable-Rate Mortgage After the Hike: How Much Your Payment Changes
• Should I Lock In My Variable Mortgage Before 2027?
• Mortgage Renewal in 2027 After the Rate Hike: Your Options in Ontario