1. What is Mortgage Penalty?

In Canada, when you break your mortgage contract before the end of its term, lenders typically charge a prepayment penalty. This penalty is the greater of either three months' interest or the interest rate differential (IRD).

2. How Penalty is Calculated

The calculator uses the standard Canadian mortgage penalty formula:

Where:

• 3 Months Interest — Three months of interest at your current mortgage rate
• Interest Rate Differential (IRD) — The difference between your current rate and the lender's current rate for a similar term, multiplied by your remaining term

3. Understanding the Components

3 Months Interest: Simple calculation based on your outstanding balance and current rate.
IRD: More complex calculation that protects the lender's expected interest income if rates have dropped since you got your mortgage.

4. Using the Calculator

Tips: Enter your current mortgage balance, interest rate, remaining term in months, and the lender's current rate for a similar mortgage term. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Why are mortgage penalties so high in Canada?
A: Canadian mortgages typically use posted rates to calculate IRD, which can result in higher penalties compared to other countries.

Q2: When is the IRD penalty applied?
A: IRD usually applies when interest rates have fallen since you got your mortgage. If rates have risen, you'll typically pay the 3 months interest penalty.

Q3: Can I negotiate my mortgage penalty?
A: Some lenders may offer reduced penalties in certain situations, but they're not obligated to.

Q4: Are penalties different for fixed vs variable rate mortgages?
A: Yes, variable rate mortgages typically charge just 3 months interest, while fixed rate mortgages use the greater of 3 months interest or IRD.

Q5: How accurate is this calculator?
A: This provides an estimate. Actual penalties may vary based on your specific mortgage terms and lender policies.