Mortgage Prepayment Penalties, Explained
By Tiffany Quaye · Last reviewed 2026-08-01
The short answer
Breaking a variable-rate mortgage usually costs three months' interest. Breaking a fixed-rate mortgage costs the greater of three months' interest or the interest rate differential (IRD), which compares your rate to the lender's current rate for the remaining term. IRD penalties vary enormously between lenders because of how each one calculates them.
Three months' interest
Straightforward: your balance multiplied by your rate, divided by four. On a $400,000 balance at 5%, that's roughly $5,000. Predictable, and usually the smaller of the two calculations when rates have risen.
The interest rate differential
IRD estimates what the lender loses by lending your money out again at today's rate for your remaining term. If your rate is well above current rates and you have years left, the number can be very large. Some lenders calculate IRD using posted rates rather than the discounted rate you actually received, which can multiply the penalty several times over.
Ways to reduce it
- Use your annual prepayment privilege before breaking — paying down 15% or 20% first reduces the balance the penalty is calculated on.
- Wait for the renewal window if it's close; within the last few months many lenders waive or reduce the penalty.
- Ask about blend-and-extend, which folds a new rate into your existing mortgage without a formal break.
- Check portability if the reason for breaking is a move.
Questions people ask
Can I avoid a mortgage penalty entirely?
Yes — by waiting until your renewal date, by porting your mortgage to a new property, or in some cases by blending your existing mortgage with new money instead of breaking it.
Is paying the penalty ever worth it?
Often, when consolidating expensive debt. If the penalty is $6,000 and the consolidation saves $900 a month in payments and thousands in interest, the break-even can arrive quickly.
Want this applied to your actual numbers?
Articles are general. Your file isn't. Bring your balances and your renewal date and I'll tell you what I'd do in your position.
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Not sure which option fits your situation?
Bring your numbers — mortgage balance, balances you're carrying, and what's stressing you out. I'll walk you through what's realistic, including when doing nothing is the better call.