Sometimes the mortgage you signed stops fitting your life before the term is up. Rates may have dropped, you may need to borrow against your home, or you may be moving. There are a few ways to change a mortgage mid-term, and they're easy to mix up.
Refinancing, switching and breaking
Breaking a mortgage means ending a closed term early. It's the umbrella for everything else here, and it usually costs a penalty.
Refinancing means replacing the mortgage with a new one, often to borrow more against your home's value or to roll other debt in. In Canada a refinance is generally capped at 80% of the home's value. If you refinance with a different lender before your term ends, you're breaking the old mortgage.
Switching usually means moving the same balance to a new lender, most often at renewal, when there's no penalty to pay.
There's also a middle path some lenders offer: blend and extend, where your current rate is blended with today's rate and the term is extended, without a full penalty. Our post on how a blended rate works covers it with numbers.
How penalties are calculated
There are two common formulas.
Three months' interest is the simpler one, and it's what most variable-rate mortgages charge:
penalty ≈ balance × rate ÷ 12 × 3
On a $300,000 balance at 5.5%, that's about $4,125.
The interest rate differential (IRD) applies to most fixed-rate mortgages, which typically charge the greater of three months' interest or the IRD. The IRD roughly measures the interest the lender loses because you're leaving, based on the gap between your rate and the rate it could lend at today for the time remaining. When rates have fallen since you signed, the IRD can be several times the three-month figure.
IRD formulas vary between lenders, particularly in how they treat the discount you received off the posted rate. That's why our calculator flags fixed-rate penalties as less certain. The only exact number is the one your lender quotes, and you can ask for it at any time.
Weighing the cost against the saving
A penalty on its own doesn't tell you much. What matters is how it compares with what a new rate would change. Here is one example, with estimated figures.
Say you owe $300,000 at 5.5% with 3 years left in the term and 20 years left on the amortization, and a new rate of 4.25% is available. Assume the penalty is three months' interest.
| Estimate | |
|---|---|
| Penalty | $4,125 |
| Current payment | $2,053 a month |
| Payment at 4.25% | $1,852 a month |
| Monthly difference | about $201 |
| Interest difference over the 3 years left | about $10,800 |
| Break-even point | about 14 months, before other costs |
The break-even point is the month when the interest you've avoided adds up to more than the penalty. Here that's around month 14, leaving about $6,650 ahead by the end of the term.
Try it
When does breaking pay for itself?
A $300,000 balance with 20 years of amortization left. The line is your position compared with staying: it starts below zero by the penalty and climbs as the lower rate saves interest.
Penalty
$4,125
Breaks even
Month 14
By the end of the term
+$6,654
ahead of staying
Legal, discharge and appraisal fees, often several hundred dollars to a couple of thousand, would push the break-even point further out. And if this were a fixed-rate mortgage with an IRD penalty two or three times larger, the scenario could flip entirely.
Three honest outcomes
When we model a break, the result falls into one of three states. Worth exploring means the estimated saving clearly outweighs the costs, and it may be worth asking a lender or broker for real quotes. Borderline means it's close enough that the exact penalty and fees decide it. Probably not worth it right now means the costs outweigh the saving, at least today.
That last one is a perfectly good answer. Knowing the numbers don't work yet is useful, and the picture can change as rates move or as your term gets shorter.
Where to go next
Breaking isn't the only way to reach the value built up in a home. The next lesson looks at borrowing against it with a home equity line of credit, and how that compares with a refinance.
Worked figures are estimates based on the example inputs shown, checked October 11, 2026. Rates, rules and lender policies change, and your own numbers will differ. This is educational information, not financial advice.