Tools

Mortgage penalty calculator

Last updated: January 18, 2022

What this tool is all about:

This tool estimates what penalty you would pay on your mortgage(s),which usually occurs if you are trying to sell a property or want to switch financing options prior to the mortgage maturing.

It’s important to confirm this penalty with your lender, since the calculation methodologies can differ slightly and the figures calculated below should only serve as an estimate. All details outlined below can be found in your mortgage commitment letter.

Disclaimer: Perch does not guarantee the accuracy of these results and should be treated as an estimate. Exact closing costs will be provided to you by your solicitor prior to your closing date. Please refer to our Terms of Use for more information.

A mortgage penalty is a fee set by the lender that you must pay if you decide to break your mortgage. You might be thinking, why would someone want to pay more money just to get out of their mortgage? Essentially, the penalty fee will compensate the lender for the interest they would be losing out on if you decide to break your mortgage. Breaking your mortgage could potentially save you thousands of dollars, however it’s not guaranteed even with a significantly lower interest rate. This will all depend on the type and size of mortgage you have as well as the remaining time left on the term. To learn more about prepayment terms and penalties, read here.

When you get a mortgage to buy a home, a mortgage lender will give you a loan that you must pay back in a specific amount of time, which is called the amortization period (e.g. 30 years). The term is the length of time you are committed to the mortgage rate and lender conditions, which is typically a shorter amount of time (e.g. 1 – 5 years). Once the term is over, you are required to renegotiate the terms of payment or look for a new one. However, if you choose to change the terms of your mortgage before the end of the term, this is considered breaking the mortgage. In short, breaking a mortgage means that you are moving away from the payment schedule you had initially agreed to before the term is up, which will result in a penalty fee.

  • You are looking to pay off your mortgage early
  • You want to refinance the terms of your mortgage
  • You want to buy a new home
  • A change in financial circumstances
  • Switching from a variable to a fixed rate mortgage
  • Locking in a lower mortgage rate than the one you currently have
When shopping for a mortgage, there are a number of options that will be available to you. It’s important to understand each one as these factors will impact the way your mortgage payments are calculated. Options to look out for can include:
  • Amortization 
The amortization period is the amount of time a lender will give you in which you must pay back your loan. The amount of time chosen will impact how much you have to pay back. For example, a longer amortization period of 30 years will translate to a lower mortgage monthly payment (so, more affordable in your day-to-day budget), but higher interest paid (more costly over the lifetime) compared to a 25 year amortization period.
  • Length of term
The length of term is the length of time that you are committed to the terms and conditions of your mortgage. Short terms are usually about 5 years or less and will mean you will have to renew your mortgage contract sooner. You can take advantage of a lower interest rate when you sign up if it is available. With a long term, you can lock in an interest rate for longer and could be restricted to a fixed interest rate. You may have to pay a hefty prepayment penalty if you do decide to sell your home less than 5 years into your term.
  • Interest rate
Your mortgage can have a fixed or variable interest rate. A fixed interest rate has consistent mortgage payments throughout your mortgage term. You will also be able to know in advance of how much principal you will pay by the end of your term.

With a variable rate or adjustable rate, the interest rate will not be permanently locked in and may go up or down depending on the lender’s Prime Rate (which is influenced by the Bank of Canada Monetary Policy).
There are two options to consider, open and closed mortgages. The major deciding factor between the two will depend on your ability to pay off the mortgage during the set term. The type of mortgage you have will play a large part in determining the penalty for breaking your mortgage.

Open mortgages

With this type of mortgage, you have the ability to completely pay off or refinance before the end of term without having to pay a penalty fee. This mortgage would be beneficial in the case of a salary increase or other financial windfall, as you would be able to pay off a substantial amount and save on interest fees. However, open mortgages often have a very short term of 1 year or less and they usually have higher interest rates, compared to a closed mortgage.

Closed mortgages

With this type of mortgage, you will not be able to fully pay off or refinance before the end of term without having to pay a penalty fee. You are tied to the repayment terms and conditions you agreed on for the duration of the term. This mortgage is beneficial for someone who wants a fixed monthly mortgage payment. A closed mortgage can sometimes offer some payment flexibility, such as allowing increased monthly payments by a certain percentage or allowing an additional lump sum payment per year without penalty.

Open mortgage Closed Mortgage
Completely pay off or refinance before the end of term without having to pay a penalty fee Not allowed to fully pay off or refinance before the end of term without having to pay a penalty fee
Beneficial if you plan on changing mortgages in the near future (within 6 months) “Beneficial for someone who plans on keeping the same mortgage for a longer period of time”
Often have a short term of 6-12 months and they usually have higher interest rates Typically have terms of 1-10 years with competitive interest rates

It may have been some time since you signed your mortgage and the details might be a bit blurry to you. Don’t worry, this can happen to a lot of people especially if you have pre-authorized withdrawals set up. An easy way to check whether you have an open or closed mortgage is to check your mortgage statement, as it will always have the details laid out there. You can also speak to your mortgage advisor to help you find the details.

Portable mortgages

A portable mortgage will allow you to transfer your existing mortgage if you sell your home or purchase another one. This transfer includes your mortgage balance, interest rate and terms. This is a good option if you like your current terms on your existing mortgage or if you want to avoid prepayment penalties. This option only makes sense if your required mortgage amount on the next property is less than or equal to your current mortgage amount.

Assumable mortgages

This type of mortgage will allow you to take over another individual’s mortgage and their property but the original terms of the mortgage must stay the same. It will also allow someone else to take over your mortgage and property. The new buyer must be approved by the lender before they can assume the mortgage. An assumable mortgage is best for a seller who wants to move to a less expensive home and would like to avoid prepayment penalties or if you are a buyer and the interest rate on the seller’s mortgage is more competitive than what you could get today.
There are different penalties for both fixed and variable rate mortgages.

For variable rate mortgages, the penalty fee is usually equivalent to three months worth of interest based on the remaining balance on your mortgage. The interest rate used will depend on the lender, but is typically your actual interest rate or the lender’s Prime Rate.

For example a variable rate mortgage penalty calculation could be:

If you have a remaining $400,000 on your mortgage with a 4% mortgage interest rate, three months of interest would be $4,000.

For fixed-rate mortgages, the penalty fee is the greater of the interest rate differential (IRD) or 3 months interest. Most lenders have their own IRD calculation, which we take into account in our calculator above. The IRD is the lender’s calculation for what they feel they are owed for lost interest earnings on the remainder of your term. This typically is the difference between the rate they could earn today vs what your current mortgage rate is, multiplied by your loan amount and months remaining. Some lenders have more punitive IRD terms than others, which can greatly affect your final penalty amount.

Variable rate mortgages Fixed-rate mortgages
The penalty fee is always 3 months interest The penalty will be the greater of the IRD or 3 months interest
Lenders have different reference rates, which are usually the actual interest rate or their Prime Rate IRD calculations vary by lender

There are several different factors to consider before breaking a mortgage. The most important thing to consider is the cost of refinancing before opting to break your mortgage. Sometimes switching mortgages can result in a long payback period for a prepayment penalty, so it’s important to calculate how much you would really be saving if you do break your mortgage including penalties, not just the new interest rate. You also need to compare options with your current lender with other lenders so you know what the best choice is. It is always best to consult with your mortgage advisor before making a decision.

1. Determine your options

Scope out what mortgage rates would be available to you today and compare it to what you currently have. You can use the Perch Pathfinder tool to help you along the way.

2. Confirm the costs

After you’ve confirmed the potential savings from switching to a new mortgage product, calculate the prepayment penalty fee. It is recommended that you contact your mortgage advisor or lender to confirm this amount before proceeding, as your mortgage may have uncommon terms that affect the result. You can also use this free Perch mortgage penalty calculator to help you.

3. Determine your options

To switch lenders, you’ll need to ensure you qualify as this is deemed to be a new mortgage application.It’s best to talk to your mortgage advisor to understand all of the terms, conditions and risks associated with breaking your mortgage so you can be sure you are making the right decision

4. Submit a mortgage application

This is a simplified application that will only require the basic income documents and current property statements.  
Other than a prepayment penalty fee that will depend on whether you have an open or closed mortgage, there are other potential costs when breaking a mortgage such as:
  • Administrative fees
  • Appraisal fees
  • Reinvestment fees – if you pay out your mortgage in the first term
  • Mortgage discharge fees – to remove the charge on the current mortgage and register a new one
Other than a prepayment penalty fee that will depend on whether you have an open or closed mortgage, there are other potential costs when breaking a mortgage such as:
  • Legal fees (may be covered by the new lender)
  • Appraisal fees, if necessary (usually around $300)
  • Reinvestment fees – if you pay out your mortgage in the first term
  • Mortgage discharge fees – your lender charges you to remove you from their system (typically $250 to $350)
Some lenders and mortgage advisors (including Perch) offer cashback that can help offset a large portion of these costs, reducing the upfront cost of breaking a mortgage.
It’s important to consider the pros and cons before breaking your mortgage early. Some benefits would be a lower interest rate, which could potentially save you more money than with the interest rate you have now. If you keep your payments the same, you could also pay off your mortgage faster. You could potentially lock in a lower interest rate for the next term of the mortgage as well. On the other hand, you could end up paying more in the long run due to additional fees with a prepayment penalty. You could even end up unqualified for a mortgage based on the economic conditions.

Pros
Cons
Lower interest rate Paying more in the long run due to fees and mortgage penalties
Pay off your mortgage faster Undergo the stress test again in order to re-qualify for a new mortgage application. Depending on the economic conditions at the time, you might not qualify for a mortgage anymore
Change your mortgage terms to suit your financial situation better
Lock in a lower interest rate for the new term of the mortgage
Access the equity in your home if you need funds
It’s a good idea to shop around and compare different mortgage rates to ensure you get the best deal. Perch mortgage advisors (and in general, mortgage brokers) are trained to represent borrowers when obtaining financing to buy their homes. Since they are not employed by any one financial institution, they are not limited to the products they can offer you and are the best bet when it comes to finding the best mortgage that fits your needs. If you are looking to break your mortgage, using our mortgage penalty calculator and consulting with a mortgage advisor is a safe way to know whether you are making the right decision.

Sign up today for a Perch profile to connect with a mortgage advisor today.