1. What is Mortgage Prepayment Penalty?

In Canada, mortgage prepayment penalties are charged when you break your mortgage contract before the end of its term. Lenders typically charge the greater of either three months' interest or the interest rate differential (IRD).

2. How Does the Calculator Work?

The calculator uses the standard Canadian mortgage prepayment formula:

Where:

• 3 Months Interest: Mortgage balance × original interest rate × 0.25
• IRD Calculation: Mortgage balance × (original rate - current rate) × (months remaining ÷ 12)

3. Understanding IRD vs 3 Months Interest

3 Months Interest: Simple calculation used when current rates are higher than your original rate.
IRD Calculation: More complex calculation used when current rates are lower than your original rate.

4. Using the Calculator

Tips: Enter your current mortgage balance, original interest rate, current interest rate offered by lender, and months remaining in your term. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Why are prepayment penalties so high in Canada?
A: Canadian mortgages are typically collateral charges, and lenders use penalties to recover lost interest when you break the contract.

Q2: Are all mortgages subject to these penalties?
A: Most fixed-rate mortgages use this calculation. Variable rate mortgages typically charge only 3 months interest.

Q3: Can I negotiate the prepayment penalty?
A: Penalties are usually non-negotiable as they're specified in your mortgage contract.

Q4: Are there ways to reduce the penalty?
A: Some lenders allow penalty-free prepayments up to a certain amount each year (typically 10-20% of original balance).

Q5: Does this calculator work for all Canadian lenders?
A: Most major Canadian banks use similar calculations, but some lenders may have different methods - always verify with your lender.