Quick Answer
- Closed variable-rate mortgages pay three months’ interest as the break penalty. Open mortgages carry no penalty.
- Closed fixed-rate mortgages pay the greater of three months’ interest or the Interest Rate Differential (IRD).
- The IRD collapses to zero when today’s rates meet or exceed your contract rate — the fixed penalty then equals variable.
- Section 10 of the federal Interest Act caps penalties at three months’ interest after month sixty on terms longer than five years.
- Big-6 banks anchor the IRD to posted rates, which can produce a penalty three to five times a monoline lender’s on the same mortgage.
Why the Penalty Gap Matters Right Now
If you are weighing a fixed-rate mortgage against a variable one, or you just called your lender to break your mortgage and the payout figure they quoted made you sit down, the fixed-vs-variable penalty gap is likely the story you need.
Most Canadians assume the answer is simple: variable is cheaper to break, fixed is more expensive. That is often true, but not always. The dollar gap between the two depends on your balance, how many months are left in your term, and whether rates have moved up or down since you signed.
The Bank of Canada held its overnight rate at 2.25% on March 18, 2026, and roughly 1.8 million Canadian mortgages are up for renewal around mid-2026. Many of those borrowers are choosing between rate types with exit cost quietly deciding the math.
Pick Your Path
Three reasons you may have landed here. Pick the one that matches your situation and jump straight to the section that answers it.
Choosing a mortgage right now. If you want exit cost as part of the rate-type decision, jump to The Dollar Gap.
Received a surprise quote. Read When the IRD Collapses and Posted vs Discounted back-to-back.
Term longer than five years, past month sixty. Skip to The Interest Act 60-Month Cap.
Use the Pegasus prepayment penalty calculator as a check against your lender’s written payout.
How Each Penalty Is Calculated
The three-month interest formula is straightforward. Your lender multiplies your outstanding balance by your contract rate, then takes one quarter of that figure. On a $400,000 balance at 5%, three months’ interest is roughly $5,000. This is universal for closed variable-rate mortgages and serves as the floor for closed fixed-rate mortgages.
The Interest Rate Differential is more involved. It estimates the interest your lender would lose by re-lending your money at today’s rate for the months you have left. The approximation lenders often use: the rate gap between your contract rate and today’s comparison rate, multiplied by your balance, multiplied by the years remaining on your term.
Open mortgages carry no penalty at all, but their higher contract rates typically outweigh the flexibility for anyone planning to stay put. For a deeper look at how the IRD is calculated in detail, Pegasus has a dedicated companion guide.
The Dollar Gap: How the Differential Scales
Balance is the most visible driver. Both formulas scale linearly with your outstanding principal, so doubling the balance doubles both penalties and widens the gap by the same factor. A $750,000 borrower typically faces a differential more than twice the size of a $300,000 borrower’s on identical mortgages.
Remaining term is the second driver, and it moves only the IRD side. Three months’ interest is indifferent to how much time you have left. The IRD stretches across every month remaining, so a five-year fixed broken at year one produces a much larger IRD than the same mortgage broken at year four.
Rate movement is the third driver. When today’s rates sit below your contract rate, the rate gap in the IRD formula widens, pushing the IRD up. When today’s rates sit above your contract rate, the gap narrows toward zero, and eventually the IRD stops being the larger of the two.
Illustrative example on a 5.20% fixed contract broken with 36 months remaining after a 1.5% rate drop: on a $300,000 balance, three months’ interest is roughly $3,900 while the IRD is closer to $13,500. On a $750,000 balance the gap widens to roughly $24,000. Figures are illustrative; see Pegasus’ full breakdown of both penalty formulas for the underlying math.
When the IRD Collapses to Three Months
This is the flip point competitors rarely highlight. Borrowers who signed at higher rates than today’s often assume they will pay a large IRD, and are relieved to learn the flat floor applies instead.
The mechanics are simple. The IRD estimates the interest the lender would lose by re-lending your money at today’s rate. If today’s rate is equal to or higher than what you are paying, the lender does not lose anything, and the IRD returns zero. Three months’ interest wins by default.
For borrowers who signed at pandemic-era lows, the IRD is typically the larger figure and the differential can be substantial. For borrowers who signed during the higher-rate stretch of 2022 to 2024, the IRD may have collapsed to nothing, and the fixed-vs-variable penalty gap disappears with it.
The Interest Act 60-Month Cap
This rule does not affect five-year fixed mortgages, which end before the cap activates. It matters most for 7-year and 10-year fixed borrowers who are past their sixtieth month. On those terms, the fixed-vs-variable penalty gap effectively closes — both types default to three months’ interest.
The cap is a statutory ceiling, not something you have to request. Federally regulated lenders apply it automatically. If your term is longer than five years and you are past month sixty, your payout statement should reflect the three-month figure, not an IRD calculation. Ask your lender to confirm the cap has been applied before signing anything.
Posted Rate vs Discounted Rate: Why the Same Fixed Produces Two Gaps
Two borrowers with identical fixed contracts can face very different IRDs, because their lenders do not use the same comparison rate.
Big-6 banks typically anchor the IRD comparison rate to their posted rate, then subtract your original discount off that posted figure. Because posted rates are advertised well above what most borrowers actually pay, this widens the rate gap in the IRD formula and inflates the penalty. A Big-6 IRD can run three to five times what a monoline would charge on the same mortgage.
Monoline lenders — mortgage-only companies that reach borrowers through brokers — and many credit unions anchor to discounted market rates instead. Same balance, same remaining term, same contract rate: a smaller rate gap, a smaller IRD, and often a penalty close to three months’ interest.
According to Razi Khan, Founder and Mortgage Broker at Pegasus, lender choice at signing sets your exit cost more than most borrowers realize. The rate on the front page gets attention. The penalty methodology in the fine print quietly decides what it costs to leave.
Estimating Your Exit Cost by Rate Type
You can get to a working estimate in six steps.
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1
Confirm your mortgage type. Pull out your mortgage contract. Look for “closed variable-rate,” “closed fixed-rate,” or “open.” The type decides which formula applies.
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2
Find your outstanding balance and months remaining. Both are on your most recent mortgage statement or in your lender’s online portal.
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3
Calculate three months’ interest. Multiply your balance by your contract rate, then divide by four. This is your penalty if you have variable. If fixed, hold this figure aside.
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4
If fixed, estimate the IRD. Ask your lender for the comparison rate they would use today. Subtract that from your contract rate, multiply by your balance, multiply by the years left.
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5
Take the greater of the two. For fixed, your penalty is whichever figure is larger. For variable, only step three applies.
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6
Request the exact figure in writing. Only the payout statement from your lender is binding. Use the Pegasus penalty calculator to run the numbers and verify against your lender’s quote. In Quebec, the discharge is handled by a notary rather than a lawyer.
Common Mistakes When Estimating the Differential
Six recurring errors cost Canadians thousands at exit. Watch for these before you commit to a break.
- Assuming fixed always costs more. When rates have risen since you signed, the IRD often collapses to zero and both mortgage types charge the same three-month figure.
- Using posted rates for both formulas. Only the fixed-rate IRD uses posted rates at Big-6 banks. The three-month formula uses your contract rate directly.
- Forgetting the Interest Act cap on longer terms. If your term is longer than five years and you are past month sixty, the cap eliminates IRD exposure. Confirm the cap applies before signing.
- Omitting the original discount from your own IRD math. Big-6 IRDs typically subtract the discount you received from today’s posted rate. Skipping that step underestimates the penalty.
- Treating any calculator estimate as final. Only the lender’s written payout statement is binding. Online estimates are check numbers, not quotes.
- Confusing convertible clauses with true flexibility. A variable that lets you lock into fixed mid-term is not the same as breaking without penalty. Convertible changes rate type, not exit cost.
Frequently Asked Questions
Is the penalty higher on a fixed or variable mortgage in Canada?
Does a variable mortgage always have a three-month interest penalty?
When does the fixed mortgage penalty drop to three months’ interest?
What is the difference between IRD and three months’ interest?
How do I know if my fixed mortgage will charge IRD or three months?
Why is my fixed penalty so much higher than my friend’s variable?
Can I switch from variable to fixed without a penalty?
Is it worth choosing variable just for the lower break penalty?
See the exit-cost math on your specific mortgage
Pegasus shops more than 50 lenders and can show you the fixed-vs-variable penalty differential on your actual balance and lender in a single conversation. No cost to you — the lender pays the broker on completion.
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About the author
Razi Khan
Founder, CEO & Licensed Mortgage Broker · Pegasus Mortgage Lending · Toronto, Ontario · FSRA Lic # 11479
Razi Khan is the Founder, CEO, and a licensed Mortgage Broker at Pegasus Mortgage Lending Center Inc., based in Toronto. With over 20 years of experience in the Canadian mortgage industry, Razi has personally guided more than 3,000 clients through some of the most complex and high-stakes financial decisions of their lives — from first-time purchases in the GTA to refinancing strategies, alternative lending solutions, and cross-border mortgages for Canadians buying in the United States.
Razi founded Pegasus in October 2008, launching the brokerage at the height of a global financial crisis. He works across the full spectrum of borrower profiles, with particular expertise in complex files including self-employed borrowers, credit-challenged clients, and investors building multi-property portfolios.
Learn more about Razi Khan →Sources & References
- Financial Consumer Agency of Canada — Mortgage prepayment penalties — https://www.canada.ca/en/financial-consumer-agency/services/mortgages/prepayment-penalty.html
- Interest Act, R.S.C. 1985, c. I-15 (Justice Laws Website) — https://laws-lois.justice.gc.ca/eng/acts/i-15/
- Bank of Canada — Key interest rate history — https://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/
- OSFI — Guideline B-20: Residential Mortgage Underwriting Practices and Procedures — https://www.osfi-bsif.gc.ca/en/guidance/guidance-library/residential-mortgage-underwriting-practices-procedures-guideline-b-20