Penalties for Breaking a Mortgage Early – Big Bank vs. Non-Bank Lender

As discussed previously, when it comes to choosing a mortgage, it does not always come down to the rate.

The question I hear most people focus on these days is “What is your lowest rate?” Although the rate is important, it is just one aspect of a mortgage – there are other aspects of a mortgage that are just as important. My job as a Mortgage Broker is to make sure my clients understand all the other important aspects first, and then make an educated decision on the best mortgage product for them.

One of these aspects is regarding how penalties are calculated if/when you discharge your mortgage early (cancel your mortgage early due to sale of the property or a refinance).

Knowing how the lender calculates their penalty is very important because the last thing you want to deal with is an extremely painful and expensive penalty if/when you want to get out early.

On a variable rate mortgage, the penalty is consistent between lenders. The standard is typically a three-month interest penalty.

However, when looking at fixed rate mortgages, the penalty is usually “the higher of Interest Rate Differential (IRD) or three months interest”. In today’s market, the most common penalty for fixed rate mortgages is the IRD penalty and there is a significant difference between how big banks calculate your IRD penalty and how most non-bank lenders calculate it and this difference could shock you. Lets take an a look at an example below:

Non-Bank Lender
Contract Rate: 3.19%
Current Rate (Current discounted rate closest to your remaining term): 2.49%
Differential (Contract rate – Current rate): 0.70%
Remaining Balance: $300,000
Months Remaining on Term: 24
Penalty Owing: $4200
*Formula: Remaining Balance x (Differential / 12) x Remaining Months


Big Bank
Contract Rate: 3.19%
Current Posted Rate (Current discounted rate closest to your remaining term): 2.84%
Original Discount (Discount off the posted rate): 1.80%
Differential (Contract rate – (Current posted rate – Original Discount): 2.15%
Remaining Balance: $300,000
Months Remaining 24
Penalty Owing $12,900
*Formula: Remaining Balance x (Differential / 12) x Remaining Months

The big difference between how big banks and non-bank lenders calculate IRD is in the way big banks calculate the “differential”. Two things come into play in the big bank’s calculation that does not come into play with the non-bank lenders.

  • Big banks will use their much higher posted rates where non-bank lenders use their lower current market rates
  • Big banks also use the original discount you received on your interest rate and utilize that number in their calculations

Bottom line is, there is an $8700 difference in penalty when comparing the big bank and the non-bank lender in this example above. Definitely something to think about.