Understanding Mortgage Prepayment Penalties
Want to refinance, but worried about the penalty? You should be — prepayment penalties can be significant. But sometimes they’re worth paying, and sometimes there are ways to minimize them.
How Penalties Are Calculated
Variable Rate Mortgages
Simple: 3 months’ interest. On a $400,000 mortgage at 5%, that’s about $5,000. Predictable and usually reasonable.
Fixed Rate Mortgages
The greater of 3 months’ interest OR the Interest Rate Differential (IRD). IRD can be substantial — sometimes $15,000-$25,000 or more — depending on how much rates have dropped since you locked in and how much time remains on your term.
Strategies to Reduce Penalties
- Port your mortgage: If buying a new home, you may be able to transfer your existing mortgage
- Wait for renewal: At renewal, there’s no penalty to change lenders or terms
- Blend and extend: Some lenders let you blend your current rate with a new rate and extend your term
- Use prepayment privileges: Make maximum lump sum payments first to reduce balance before breaking
💡 Get The Real Number
Request a penalty quote in writing from your lender. Don’t guess — get the exact number. Some lenders’ IRD calculations are more punitive than others. We can help you understand the calculation.
Elevation Mortgage
INDEPENDENT MORTGAGE BROKERS · LICENSED AB & BC
Julie & Andy Jeffery — independent mortgage brokers serving Calgary, Nelson BC,
and clients across Alberta and British Columbia.
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