Why a Fixed Penalty Can Run to Five Figures While a Variable One Doesn't

Two Different Formulas, Not One

Break a closed mortgage before its term ends — by selling, refinancing or switching lenders — and most lenders charge a penalty. The Financial Consumer Agency of Canada (FCAC) sets out how it's typically calculated, and the method depends entirely on which kind of mortgage you hold.

On a variable mortgage, the penalty is usually a flat calculation: three months' interest on your remaining balance. On a fixed mortgage, FCAC describes the penalty as the greater of two figures — three months' interest, or the interest differential, known as the IRD. Whichever number is larger is what you pay, plus any administration fee your lender charges on top.

The Gap, in FCAC's Own Numbers

FCAC's own published example makes the size of the gap concrete. On a mortgage with a $200,000 balance, an original coupon of 6%, and 36 months remaining in the term:

• Three months' interest works out to $3,000
• The IRD works out to $12,000
• The lender charges the greater figure: $12,000, plus any administration fee

A variable mortgage never runs this comparison. Because its payment already tracks current pricing, there's no locked-in figure for a lender to measure a loss against — which is the structural reason its penalty stays capped at three months' interest regardless of how much of the term remains.

When the Gap Is Small Instead of Large

The IRD isn't always the bigger number. It depends on how much of your term is left, and how far your contracted figure sits from what's available today. Take a $200,000 balance with only six months left in the term, on the same 6% contract: three months' interest is still $3,000, but the IRD calculation over a much shorter remaining period typically shrinks close to, or below, that three-month figure — because there's simply less remaining time for a lender to measure a loss against.

That's why the same borrower, on the same mortgage, can see the IRD dominate early in a term and fade to irrelevance near the end of it. It's also why refinancing or switching lenders close to your renewal date is generally far less expensive than doing it in year one of a five-year term.

Why the Same Mortgage Can Produce Two Very Different Penalties

The IRD calculation itself isn't standardized across lenders, and the choice a lender makes at one specific step is often the difference between a manageable penalty and a devastating one: what figure does the lender compare your contracted number against?

• Compared against what you signed: the lender uses the actual, discounted figure in your contract. This usually reflects the real gap and tends to produce the smaller of the two possible outcomes.
• Compared against a published benchmark: the lender uses its own posted figure, which is normally well above what anyone actually pays. This widens the gap artificially and can produce a penalty several times larger on an identical balance and term.

Credit unions and broker-channel lenders more often compare against what you signed. Some of the large banks compare against a published benchmark. Two borrowers with the same balance, the same remaining term and the same reason for leaving can face very different bills depending purely on which method their lender uses — which is exactly why it's worth asking your lender which method applies to your mortgage before you assume anything about what breaking it would cost.

Before You Break a Fixed Mortgage

None of this means a fixed mortgage is the wrong choice, or that breaking one is always a mistake — a lower cost of borrowing for the rest of a term, or a genuine need to move, can still make it worth the penalty. What it means is that the number is worth calculating precisely, with your actual contract and your lender's actual method, before you commit to a plan built on a rough guess.

FCAC also points out that some relief is often available before a penalty is even the right question: maximizing your annual prepayment privileges, waiting until your term actually ends, or porting your mortgage to a new property can each avoid triggering the penalty at all, depending on your situation.

Knowing the Number Before You Owe It

The math above is exactly what our own Break or Stay tool runs, using the same two comparisons — against what you signed, and against a published benchmark — described on our Penalty Protector Pro page. It's built to take your actual balance, contracted figure and time remaining and show both possible outcomes side by side, rather than leaving you to guess which method your lender will use.

Your lender's mortgage statement, or a call to their penalty desk, will tell you which method actually applies to your contract. That single phone call, made before you list your home or start shopping a refinance, is the difference between planning around a real number and being surprised by one at your lawyer's office.