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Get My Free Estimate →On a closed fixed mortgage the charge is the greater of three months’ interest or the interest rate differential. On a closed variable it is three months’ interest only. The IRD is calculated two ways: Method A compares your rate to the lender’s posted rate minus the discount you received at origination, and Method B compares it to the lender’s current actual rate. All five big banks use Method A. On one bank’s own published example — $99,008 at 6.30 per cent, 53 months left, posted 6.50 per cent, discount 2.00 per cent — the add-back produces a charge of $7,871.12; without it there would be no differential at all and the charge would be three months’ interest of about $1,559. Section 10 of the Interest Act caps the charge at three months’ interest only where the term exceeds five years and five years have already elapsed, and not at all for corporate borrowers.
Breaking a fixed mortgage costs the greater of three months’ interest or the interest rate differential. Everybody knows that sentence. Almost nobody knows that the IRD is calculated two completely different ways in Canada, that the method your lender uses is written on its own website, and that on the lender’s own published example the difference between the two methods is roughly five times.
This page shows the arithmetic using each bank’s own worked examples, and sets out which lenders use which method.
The one legal protection, and why it almost never helps you
Section 10(1) of the federal Interest Act is the provision people reach for. Its actual terms:
“Whenever any principal money or interest secured by mortgage on real property … is not, under the terms of the mortgage, payable until a time more than five years after the date of the mortgage, then, if at any time after the expiration of the five years, any person liable to pay … tenders or pays … the amount due for principal money and interest … together with three months further interest in lieu of notice, no further interest shall be chargeable…”
Read the two conditions. The term must be longer than five years, and five years must already have elapsed. A borrower breaking a standard five-year mortgage in year three has no section 10 protection whatsoever. This is the most commonly repeated misunderstanding about Canadian mortgage penalties, and it is repeated by people who should know better.
Two further limits. Section 10(2) excludes mortgages given by corporations — relevant to anyone holding an Etobicoke rental through a company. And s. 10 gives a cap on the charge for paying out after five years; it is not a general right to prepay whenever you like.
A separate provision worth knowing if you fall behind: s. 8(1) prohibits any fine, penalty or rate of interest on arrears that has the effect of increasing the charge on the arrears beyond the rate payable on principal not in arrears. Default interest premiums on a residential mortgage are constrained.
Three months’ interest: the simple one
Every lender computes this the same way. In one lender’s own wording: prepayment amount × rate × 3 ÷ 12. Its own example: $150,000 × 6.5 per cent × 3/12 = $2,437.50.
On a closed variable-rate mortgage this is the whole story. Every lender I checked charges three months’ interest only on a variable, with no IRD at all — one states it “always” does. One adds a wrinkle worth quoting: the rate used “will be your variable interest rate at the time of the prepayment or your cap rate (if there is one)”.
The IRD, and the two ways of computing it
The idea is simple: the lender says it will lose the difference between your rate and what it can lend at now, for the months remaining. The fight is over what “what it can lend at now” means.
| Method A — posted rate minus your discount | Method B — contract rate comparison | |
|---|---|---|
| The comparison rate | The lender’s current posted rate for the closest remaining term, minus the discount you received at origination | The lender’s current actual rate for a replacement mortgage of similar remaining term |
| Effect | Adding your discount back lowers the comparison rate, which widens the gap and enlarges the penalty | The gap is the real one |
| Who uses it | All five big banks | The monolines and direct banks I checked |
What the add-back actually costs, on a bank’s own numbers
One major bank publishes this worked example: a balance of $99,008 at 6.30 per cent, 53 months remaining, its posted four-year rate 6.50 per cent, and a discount received of 2.00 per cent.
| Step | Calculation | Result |
|---|---|---|
| The comparison rate, with the discount added back | 6.50% posted − 2.00% discount | 4.50% |
| The differential | 6.30% − 4.50% | 1.80% |
| The charge | 0.0180 × $99,008 × 53 ÷ 12 | $7,871.12 |
Now run the same numbers without the discount add-back. The comparison would be 6.30 per cent against a 6.50 per cent posted rate. That is negative — there is no differential at all, and the charge falls back to three months’ interest:
| Step | Calculation | Result |
|---|---|---|
| Three months’ interest | $99,008 × 6.30% ÷ 4 | $1,559.38 |
The 2 per cent discount add-back turns a $1,559 penalty into $7,871 — about five times larger — on the bank’s own published example. The second calculation is mine, run on the bank’s numbers, and I am labelling it as derived rather than quoted. The first is theirs.
Other published examples show the same pattern. One bank’s illustration: $100,000 at 9 per cent with 36 months left; three months’ interest $2,250; posted comparable rate 5.5 per cent after deducting the 0.5 per cent discount received; charge $10,500, which is 4.7 times the three-month figure. Another: 9 per cent against 6.5 per cent posted less 0.5 per cent discount, giving 3 per cent over 36 months on $100,000 = $9,000 against $2,250. A third: $100,000 over two years, three months’ interest $1,749.99, IRD $4,036.33, charge $4,036.33.
Which lenders use which method
Every entry below is from the lender’s own published page or PDF, in its own words. I have deliberately not used third-party summaries for this, because third parties get it wrong.
| Lender | Comparison rate, in the lender’s own words | Method |
|---|---|---|
| RBC | “we will deduct the amount of this rate reduction from the posted rate before calculating the difference between the interest rates” | A |
| TD | the “posted interest rate for a similar mortgage, minus any rate discount you received” | A |
| Scotiabank | the current interest rate “less the rate discount received on the existing mortgage” | A |
| BMO | the rate currently charged for a similar mortgage “reduced by any rate discount you may have received” | A |
| CIBC | interest at your current rate “plus any interest rate discount you received” versus interest at “CIBC’s current posted interest rate for the comparison mortgage” | A — algebraically the same |
| First National | “the difference between your current mortgage interest rate and the current First National interest rate on a replacement mortgage for the time remaining” — no discount add-back stated | B |
| Tangerine | compares the customer’s rate against Tangerine’s current posted rate. Tangerine posts one rate, so there is no discount to add back | B in effect |
| National Bank | Its own terminology: the difference between the “posted rate” and the “standard rate” over the remaining term, plus one month of interest at the posted rate, capped at $500 | Own variant |
All five big banks add your discount back. The monolines and the direct bank do not. That is the finding, and it is not a small one. The bigger the discount you negotiated off posted, the larger your eventual penalty at a Method A lender — which means the sharper you were at origination, the more it costs you to leave.
Prepayment privileges, from the lenders’ own pages
Using your annual privilege before you break reduces the balance the penalty is calculated on. Where a lender does not publish a figure, I have said so rather than guessing.
| Lender | Annual lump sum | Payment increase |
|---|---|---|
| BMO | 20% of the original mortgage amount (10% on Smart Fixed) | 20% of the current payment (10% on Smart Fixed) |
| Scotiabank | “up to 10%, 15% or 20% of your original principal each year” | Not stated in the document |
| TD | “up to 15% of the principal amount on a closed mortgage annually” | Not published |
| RBC | 10% of the original principal annually | Up to 10% per year, plus a double-up option |
| National Bank | 10% of the initial principal per calendar year | Within the same 10% envelope |
| CIBC | Not published — only a generic statement that closed mortgages “often” allow 10% to 20% | Not published |
| First National, Tangerine | Not published on the pages I read |
Porting
Porting transfers the existing mortgage — balance, interest rate, terms and conditions — to a new property, and the federal consumer agency describes it as worth considering “to avoid prepayment penalties for breaking your mortgage contract early”.
You will see a specific number of days quoted for how long you have between selling and buying to port. I could not verify any such window from the federal agency or from any lender’s own page, so I am not printing one. Ask your lender for their window in writing before you firm up a sale, because if you miss it the penalty is back.
What to actually do before you break
| Step | Why |
|---|---|
| Get the payout statement in writing | Not an estimate from a calculator. The lender’s own figure, with the calculation shown |
| Ask which comparison rate they used and whether a discount was added back | This single question identifies whether you are facing Method A or Method B, and it is answerable from your own documents |
| Check the remaining term against five years | Section 10 only helps where the term exceeded five years and five years have already run |
| Use your annual prepayment privilege first | It reduces the balance the penalty is computed on. Where the privilege is 20 per cent of the original amount, that is a material reduction |
| Price porting against breaking | Porting carries the rate to the new property and avoids the charge entirely |
| Ask whether the new lender will cover the penalty | Competing lenders sometimes do on a switch. It costs nothing to ask and it is not offered unprompted |
Six things people get wrong
| The belief | The position |
|---|---|
| “The Interest Act caps my penalty at three months’ interest.” | Only where the term is longer than five years and five years have already expired. Inside a five-year term, s. 10 does nothing. |
| “The IRD is a standard calculation.” | There are two methods. Five big banks deduct your origination discount from the posted comparison rate; the monolines and direct banks I checked do not. |
| “A bigger discount at origination is always better.” | At a Method A lender the discount is added back into the penalty calculation later. On one bank’s own example, a 2 per cent discount turned a $1,559 charge into $7,871. |
| “Variable mortgages have an IRD too.” | Every lender I checked charges three months’ interest only on a closed variable, with no IRD. |
| “My corporation gets the same protection.” | Section 10(2) excludes mortgages given by corporations from the s. 10 protection entirely. |
| “The online penalty calculator told me the number.” | Get the payout statement in writing from the lender, and ask them to show the comparison rate they used. |
Thinking about selling before your term is up?
The penalty is often the deciding number and it is knowable before you list. Get the payout statement in writing, ask the lender which comparison rate they used, and then we can look at what the move actually costs against what it gains. I am not a licensed mortgage professional and the penalty question belongs with your lender or broker — but I can make sure it is in the arithmetic before you commit.
connect@jatindua.com · 437-987-1925 · Book a free consultation
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Frequently asked questions
Does the Interest Act limit my mortgage penalty to three months’ interest?
Rarely, and not in the situation most people are in. Section 10(1) applies where principal or interest secured by a mortgage is not payable until more than five years after the date of the mortgage, and then only after those five years have expired. It gives a right to pay out on three months’ further interest in lieu of notice. So it does nothing inside a standard five-year term, which is when most people break. Section 10(2) also excludes mortgages given by corporations.
How is three months’ interest calculated?
Prepayment amount multiplied by the rate, multiplied by three, divided by twelve. One lender publishes the example: $150,000 at 6.5 per cent gives $150,000 × 0.065 × 3/12 = $2,437.50.
What is the interest rate differential?
It is the lender’s estimate of what it loses by having your money back early, expressed as the difference between your rate and what it can lend at now, applied to the balance over the remaining months. The dispute is over what “what it can lend at now” means, and there are two competing answers.
What are the two IRD methods and why does it matter?
Method A compares your contract rate against the lender’s current posted rate for the closest remaining term, minus the discount you received at origination. Method B compares your contract rate against the lender’s current actual rate for a replacement mortgage. Adding the discount back lowers the comparison rate, which widens the differential and enlarges the penalty. On one bank’s own published example — $99,008 at 6.30 per cent, 53 months remaining, posted rate 6.50 per cent, discount 2.00 per cent — Method A gives a comparison rate of 4.50 per cent, a differential of 1.80 per cent and a charge of $7,871.12. Run without the add-back, 6.30 per cent against 6.50 per cent is negative, so there would be no differential and the charge would be three months’ interest of about $1,559.
Which lenders use which method?
From each lender’s own published wording: RBC deducts the rate reduction from the posted rate; TD uses the posted rate for a similar mortgage minus any rate discount received; Scotiabank uses the current rate less the rate discount received; BMO uses the rate currently charged reduced by any rate discount received; CIBC compares your rate plus any discount received against its current posted rate, which is algebraically the same thing. First National describes the comparison as its current rate on a replacement mortgage with no discount add-back stated, and Tangerine compares against its own single posted rate so there is no discount to add back. National Bank uses its own variant, adding one month of interest at the posted rate capped at $500.
Is there an IRD on a variable-rate mortgage?
On every lender checked, no. Closed variable-rate mortgages attract three months’ interest only. One lender states it “always” charges three months’ interest on a variable. One adds that the rate used will be your variable rate at the time of prepayment or your cap rate if there is one.
Does negotiating a big discount cost me later?
At a Method A lender, yes, in a real sense. The discount you negotiated off posted is added back into the comparison rate when the penalty is calculated, so a larger discount produces a larger differential and a larger charge. On the worked example above, a 2 per cent discount is the entire difference between a roughly $1,559 charge and a $7,871 one. That is not a reason to negotiate badly. It is a reason to know your lender’s method before you sign, and to weigh it if you think you may move mid-term.
How much can I prepay each year without a penalty?
It varies and several lenders do not publish it. From their own pages: BMO allows 20 per cent of the original amount annually and a 20 per cent payment increase, or 10 per cent on its Smart Fixed product; Scotiabank states up to 10, 15 or 20 per cent of original principal depending on the mortgage; TD states up to 15 per cent of the principal amount on a closed mortgage annually; RBC allows 10 per cent of original principal plus a 10 per cent payment increase; National Bank allows 10 per cent of the initial principal per calendar year. CIBC, First National and Tangerine do not publish a figure on the pages I read. Using the privilege before you break reduces the balance the penalty is computed on.
Can I avoid the penalty by porting?
Often. The Financial Consumer Agency of Canada describes porting as transferring the existing mortgage balance, interest rate and terms and conditions to a new property, and suggests considering it to avoid prepayment penalties for breaking early. There is a time window between the two closings, but I could not verify any specific number of days from FCAC or from any lender’s own page, so ask your lender in writing for theirs before you firm up a sale.
Related reading
- Mortgage renewal and switching lenders in Ontario
- Mortgage renewal difficulty in Ontario: the options before default
- Power of sale in Ontario: the fifteen-day clock and the money waterfall
- The real cost of buying and selling a home in the GTA
Sources
Every figure on this page traces to one of these, and each was read on 30 August 2026. Primary sources only — statute, regulation, and the government or agency that administers the rule. Where I could not verify something from a primary source, the page says so instead of guessing.
- Interest Act, R.S.C. 1985, c. I-15 — sections 8 and 10. Justice Laws Website consolidation, last amended 18 June 2008. Section 10(1) gives a right to pay out on three months’ further interest in lieu of notice, but only where the money is not payable until more than five years after the date of the mortgage and only after those five years have expired. Section 10(2) excludes mortgages given by corporations. Accessed 30 August 2026.
- Understanding mortgage prepayment charges — RBC Royal Bank. Royal Bank of Canada. States that where a reduced rate below the posted rate was received, RBC deducts the amount of that rate reduction from the posted rate before calculating the difference. The accompanying PDF worked example is dated August 2014. Accessed 30 August 2026.
- What happens if you break your mortgage — TD Canada Trust. Toronto-Dominion Bank. Describes the interest rate differential as using the posted interest rate for a similar mortgage, minus any rate discount received. Accessed 30 August 2026.
- What you need to know: mortgages and mortgage prepayment charges — Scotiabank (PDF). Bank of Nova Scotia, document dated November 2022. Uses the current interest rate less the rate discount received on the existing mortgage. Accessed 30 August 2026.
- Mortgage prepayments — BMO (PDF). Bank of Montreal, document 19-2590 / 5008728, dated 06/23. Carries a worked interest rate differential example reducing the comparison rate by the rate discount received. Accessed 30 August 2026.
- Prepayment charges — CIBC. Canadian Imperial Bank of Commerce. Compares interest at the current mortgage rate plus any interest rate discount received against CIBC’s current posted rate for the comparison mortgage. Accessed 30 August 2026.
- Understanding prepayment charges — First National. First National Financial LP. Describes the interest rate differential as the difference between the current mortgage rate and the current First National rate on a replacement mortgage for the time remaining. No discount add-back is stated. Accessed 30 August 2026.
- How can I estimate my prepayment charges — Tangerine. Tangerine Bank. Compares the customer’s rate against Tangerine’s current posted rate. States that Tangerine always charges a three-month interest penalty on variable rate mortgages. Accessed 30 August 2026.
- Mortgage prepayment and indemnities guide — National Bank (PDF). National Bank of Canada, 16 December 2022. Uses its own terminology of posted rate and standard rate, and adds one month of interest at the posted rate to the differential, capped at $500. Accessed 30 August 2026.
- Choosing a mortgage — Financial Consumer Agency of Canada. Financial Consumer Agency of Canada, date modified 15 October 2025. Describes porting as transferring the existing mortgage balance, interest rate and terms, and suggests considering it to avoid prepayment penalties. Accessed 30 August 2026.
About the author — Jatin Dua, Etobicoke real estate agent
I’m the Broker of Record at RE/MAX Quantum Realty, 799 The Queensway in Etobicoke. I write these pages the same way I work a file: read the primary source, quote it, date it, and say plainly where the source is silent or where two sources disagree. If a figure on this page has no citation beside it, that is a mistake and I want to hear about it.
I work with buyers, sellers, renters and investors across Etobicoke, Mimico, Humber Bay Shores, New Toronto, Long Branch, Alderwood and Stonegate–Queensway. connect@jatindua.com or 437-987-1925.