If you've ever asked a lender what it would cost to break your mortgage and been quoted a number that seemed to come from nowhere, this is where it came from. The formula isn't secret. It's just spread across your contract, your lender's rate sheet and a calendar.
There are two methods, and which one applies depends mostly on whether your rate is variable or fixed. Here are both, then one mortgage run through them to show why two lenders can quote very different numbers for the same balance.
Three months' interest
This is the simpler one, and for most variable-rate mortgages it's the only one that applies. TD, RBC, Scotiabank, BMO, CIBC, National Bank, Simplii and First National all describe their variable-rate closed charge as three months' interest.
Take your balance, apply your interest rate for three months, and that's the penalty. On a $400,000 balance at 5%, three months' interest is an estimated $4,950, or about $5,000. The figure moves with your balance and your rate, and nothing else.
There are small variations. Some lenders calculate it at a slightly different compounding basis, which moves the figure by a few dollars. CIBC describes the three months on a variable mortgage as calculated at the CIBC Prime Rate, and on a fixed mortgage at your rate plus any discount you received. National Bank's guide describes the three months on a fixed loan as calculated at the posted rate. So for those two, the three-month figure can be higher than the simple balance-times-rate estimate. The shape is still the same.
The interest rate differential
For fixed-rate mortgages, most Canadian contracts say the penalty is the greater of three months' interest and the interest rate differential, usually written as IRD. When rates have fallen since you signed, the IRD is usually the larger of the two, and it's the one behind the surprising quotes.
The idea is compensation. You agreed to pay, say, 5.5% for five years. If you leave after three, the lender has to lend that money out again at today's rate, which may be lower. The IRD is meant to cover the gap for the time you had left.
It has three parts. First, the gap: your rate minus a comparison rate for a term roughly matching what's left on yours. Second, your balance, which the gap is applied to. Third, the time remaining, in years or months.
On a $400,000 balance with three years left and a gap of 1.5 points, the estimated IRD is $18,000. Same balance, roughly three and a half times the three-month figure.
The comparison rate is where lenders differ
Everything in that formula is clear except one number: the comparison rate. Lenders read it in one of two ways, and our lender pages sort them into those two groups.
Posted rate less your discount. TD, RBC, Scotiabank, BMO, CIBC, Simplii and Desjardins describe comparing your rate with their current posted rate for a term close to what's left, less the discount you were given off posted when you signed. National Bank words it differently but it behaves the same way.
The rate they offer today. First National and Equitable Bank describe comparing your rate with the rate they currently offer for the remaining term.
A few other details sit in individual contracts. BMO and First National both describe a charge of three months' interest after the fifth year of a longer term. National Bank adds one month's interest, capped at $500, to its interest differential. Scotiabank calculates its IRD on a present-value basis and notes that its own calculator's estimate will in most cases be higher than the actual charge.
One mortgage, two lenders
Leila and Ravi borrowed $500,000 in October 2023 on a five-year fixed at 5.59%, with a 25-year amortization. It's now late September 2026. They owe an estimated $470,600, with 25 months left in the term. Three months' interest comes to about $6,500.
| Comparison rate | Gap | Estimated IRD | |
|---|---|---|---|
| Lender using today's offered rate | 3.95% (its two-year rate) | 1.64 points | $16,100 |
| Bank using posted rate less discount | 4.33% (5.78% posted, less 1.45) | 1.26 points | $12,300 |
At a lender comparing with today's rates, the estimated penalty is about $16,100. At a bank, about $12,300. Both are the greater of the two methods, both come from the same formula, and they're $3,800 apart.
The bank's number depends on two things. The first is the discount they received in 2023: the big banks' posted five-year rate that October was around 7.04%, so 5.59% was about 1.45 points below posted. The second is the posted rate today for a term like the 25 months they have left. Big banks publish posted rates for one, three and five years, and between the one-year and three-year points that works out to about 5.78%. Take off the 1.45 and the comparison is 4.33%.
Here, the bank method comes out lower, because the gap between posted and real rates is wider today than the discount they got in 2023. When the discount you received at signing was larger than today's gap, the effect runs the other way, and the posted-rate method produces the bigger penalty. That's the case behind most of the stories about five-figure bank penalties. Neither method is kinder in general. It depends on when you signed.
Two smaller things can also move the number. The term they compare against can be rounded, interpolated, or matched to the nearest published term, depending on the lender. The date matters too. The penalty is calculated as of the day the mortgage is discharged, not the day you asked, and your balance and the days remaining both move in between.
None of this is hidden. It's in the prepayment section of the contract you signed. It's just rarely read until it matters.
What an estimate can and can't tell you
An estimate, from a calculator or the back of an envelope, can tell you the shape of your penalty: whether it's a three-months situation or an IRD one, and roughly how large. That's often enough to know whether a lower rate is worth looking into at all.
What it can't tell you is the exact figure, because it doesn't know which rate sheet your lender reads from on the day or how it rounds the term. Several lenders publish their own prepayment calculators, and our lender pages link to them. The authoritative number is a payout statement from your lender, which they'll give you on request. You may wish to ask for one before any decision, and it's usually valid for a limited time.
The penalty is only half the question
A large penalty isn't, on its own, a reason to stay, and a small one isn't a reason to break. The penalty is a cost. What matters is whether the interest you'd save over the rest of the term is larger than that cost, plus the fees that come with a switch.
For Leila and Ravi, breaking at the bank's estimated $12,300 penalty, adding it to the mortgage, and taking a rate of 3.95% for the rest of their term saves an estimated $2,300 over those 25 months. It's positive, but thin, and discharge or legal fees could absorb it. If they would rather not break outright, a blend and extend is another option some lenders offer, and we explain it in What is a blend and extend mortgage?.
The break calculator runs this comparison with your own numbers: both penalty methods, the new payment, and the cost of staying against breaking over the same window. It works out your original discount from the date you signed, runs in your browser, and prints cleanly to take to a lender or a broker. If you'd like someone to look at a payout statement with you, a licensed broker can do that, and you can book a free conversation if it would help. Either way, sometimes the scenario shows a saving worth exploring, and often it shows that staying costs less right now. Both are good things to know.
Leila and Ravi are an illustrative composite. Posted rates are the Bank of Canada's typical big-bank posted rates as published in September 2026, and lender methods are summarised from each lender's own published information as reviewed on 28 September 2026. All figures are estimates. Your lender's calculation may differ, only your lender can give you the actual penalty, and nothing here is a recommendation.