What constitutes a prepayment
A prepayment occurs when the borrower repays principal earlier than the contract requires.
This may happen when the borrower:
Makes a lump-sum payment
Increases regular payments
Pays out the entire mortgage
Sells the property
Transfers to another lender
Refinances before maturity
Pays more than the permitted annual privilege
A lender may charge a prepayment penalty where the mortgage is closed and the repayment exceeds the contract’s permitted amount.
An open mortgage generally permits full repayment without an ordinary prepayment penalty, although discharge or administrative costs may still apply. FCAC’s guidance was updated October 15, 2025.
Prepayment privileges
A closed mortgage may permit:
A percentage lump-sum payment
Increased scheduled payments
Double-up payments
Payments on specified dates
The contract determines:
Percentage allowed
Whether it is based on original or current principal
When payments may be made
Whether unused privileges carry forward
Whether privileges remain available shortly before payout
Whether a minimum payment applies
FCAC confirms that privileges vary by lender and commonly cannot be carried forward from one year to the next.
Three months’ interest and IRD
A closed fixed-rate mortgage commonly charges the higher of:
Three months’ interest
Interest rate differential, or IRD
The contract controls the actual calculation.
A closed variable-rate mortgage commonly uses a three-month-interest formula, but some contracts contain different provisions. This should be classified as common lender practice—not a universal rule.
Three months’ interest
A simplified estimate is:
Three-month interest estimate = Outstanding balance × Annual contract rate × 3 ÷ 12
This estimate may differ from the lender’s amount because the lender can use:
A different balance date
A contractually defined rate
Daily interest
Administrative charges
Other contract provisions
Interest rate differential
IRD is intended to estimate part of the lender’s economic loss when a fixed-rate mortgage is repaid while the lender could reinvest the funds only at a lower comparable rate.
A lender may compare:
Original posted rate
Contract rate
Original discount
Current posted rate for the remaining term
Current comparison rate adjusted for the original discount
FCAC confirms that lenders use different IRD methods and that posted-rate treatment can materially affect the penalty.
Simplified penalty comparison
Assumptions
Outstanding balance: $450,000
Contract rate: 5.40%
Time remaining: 20 months
Simplified comparison rate: 4.10%
Rate difference: 1.30%
No prior prepayment
No administrative or discharge fee
This is not a lender payout quote
Variables
B = Outstanding balance
CR = Annual contract rate
RR = Comparison rate
M = Months remaining
Three-month-interest estimate
Formula
Three-month interest estimate = B × CR × 3 ÷ 12
Calculation
$450,000 × 5.40% × 3 ÷ 12 = $6,075
Result
Estimated three-month-interest charge: $6,075
Simplified IRD illustration
Formula
Simplified IRD illustration = B × (CR − RR) × M ÷ 12
Calculation
$450,000 × (5.40% − 4.10%) × 20 ÷ 12
$450,000 × 1.30% × 20 ÷ 12 = $9,750
Result
Simplified IRD illustration: $9,750
Comparison
Higher of $6,075 and $9,750 = $9,750
Interpretation
Under this simplified comparison, the estimated penalty would be $9,750.
The actual lender amount may be materially different because real IRD calculations can account for posted rates, the borrower’s original discount, compounding, exact days remaining, contractual privileges and administrative fees.
A mortgage-penalty calculator is an estimating tool. Only a current written payout statement from the lender establishes the amount required for a particular payout date.
Why posted-rate methodology matters
Assume two borrowers each receive a 5.00% contract rate.
Lender A’s posted rate was 5.25%, creating a 0.25% discount.
Lender B’s posted rate was 6.25%, creating a 1.25% discount.
If each lender incorporates the original discount differently when calculating IRD, the penalties may be substantially different even though the contract rates were identical.
The lowest contract rate therefore does not reveal the mortgage’s future break cost.
Bona fide sales clauses
Some restricted mortgages allow early payout only after a bona fide sale of the property to an arm’s-length buyer.
Such a clause can prevent the borrower from breaking the mortgage merely to:
Refinance
Consolidate debt
Access equity
Move to another lender
Other possible payout costs
Depending on the contract and transaction, the borrower may also encounter:
Discharge fee
Reinvestment fee
Administrative fee
Cashback repayment
Appraisal cost
Legal cost
Interest to the payout date
Adjustment for property taxes
Interest on arrears or other secured amounts
The penalty and the total payout are not necessarily the same number.
Requesting a payout statement
A payout statement should identify:
Principal balance
Interest to the payout date
Prepayment penalty
Fees
Other secured amounts
Expiry date of the quote
Per-diem interest after that date
Payment instructions
Penalty estimates can change because:
The balance changes
Interest accrues daily
Comparison rates move
Time remaining falls
A prepayment is applied
The requested payout date changes
Reducing penalty exposure
Depending on the contract, possible strategies include:
Use an available lump-sum privilege before payout.
Increase regular payments in advance.
Port the mortgage to a replacement property.
Wait until maturity.
Blend the existing rate with additional financing.
Select a shorter term where a sale is expected.
Choose an open mortgage for genuinely short-term borrowing.
Compare penalty formulas before selecting the mortgage.
A prepayment should not be made solely to reduce a penalty until the lender confirms that the privilege remains available and will reduce the payout calculation.
Eligibility for a lower rate should always be weighed against the flexibility likely to be needed during the term.