What are the penalties for breaking a variable mortgage versus a fixed one?

By: Renee Sylvestre-Williams on February 10, 2026

Quick answer: Should you break your mortgage?

Breaking a variable-rate mortgage usually costs three months’ interest.
Breaking a fixed-rate mortgage often costs more due to the Interest Rate Differential (IRD).
Breaking your mortgage only makes sense if interest savings exceed the penalty.

This article has been updated from a previous version in February 2026.

Mortgage rates have shifted in recent years. After rate cuts in 2024 and 2025, the Bank of Canada’s key rate is now 2.25%, down from the 5% peak seen in 2023.

As rates have fallen, some homeowners who purchased at this high may be considering whether breaking their current mortgage to secure a lower rate might be worthwhile.

Breaking a mortgage, however, comes with a prepayment penalty. This fee compensates the lender for the interest it expected to collect over the remainder of the term.

The amount varies depending on whether the mortgage is variable or fixed.

Before deciding to move forward, it’s important to understand how these penalties are calculated and under what circumstances breaking a mortgage may make financial sense.

When does breaking a mortgage make sense?

It is strictly a numbers game. You should only break your mortgage if the long-term savings outweigh the immediate penalty.

Your lender calculates your penalty based on:

How many months are left in your term
Your remaining mortgage balance
Your current interest rate
Current market rates

This is why it’s important to ask your current lender to quote the exact penalty in writing. Then, compare that cost against the interest you would save with a new lender over the same period.

Variable vs. fixed: How mortgage penalties are calculated

If you have a variable-rate mortgage, the math is usually simple. The penalty is typically three months’ worth of interest on your current balance. This makes it fairly easy to predict the cost of breaking your contract.

However, if you have a fixed-rate mortgage, the calculation is more complex. Lenders typically charge the greater of two amounts:

Three months’ interest
The Interest Rate Differential (IRD)

Because the IRD often ends up being the higher number, breaking a fixed-rate mortgage can be significantly more expensive than breaking a variable one.

What is the Interest Rate Differential (IRD)?

When you break a fixed mortgage, you are handing money back to the bank that they expected to earn interest on for the rest of your term. If interest rates have dropped since you signed your contract, the bank can only re‑lend that money at a lower rate today — meaning they lose profit.

The IRD covers that loss. It represents the difference between your original interest rate and the current rate your lender can charge for the remainder of your term.

The rule of thumb: If rates have gone down since you got your mortgage, your IRD penalty will likely be high. If rates have gone up, your penalty may simply equal three months’ interest instead.

How to minimize or avoid mortgage prepayment penalties

There are ways to reduce — and in some cases, maybe even avoid altogether — these penalty fees when you’re breaking a mortgage:

Go over the math yourself

Big banks have been subjected to class action lawsuits for how they calculated mortgage prepayment penalties that led to massive fees for mortgage holders. Your lender will do its own calculations, but don’t rely solely on their numbers.

The calculation of your prepayment penalty varies from lender to lender. However, federally regulated lenders like banks typically have a prepayment penalty calculator on their website for you to use to estimate costs.

Port your mortgage

If you’re breaking your mortgage so you can buy a new home, porting or transferring your current mortgage to the new home can save you from paying penalty fees, as you’re not breaking the mortgage.

Ask your lender if your mortgage is portable. (This is one reason why you should consider getting a mortgage with this flexibility.)

Wait until near the end of your term to walk away

If you can wait, break your mortgage when you’re near the end of your term. While the IRD is likelier to be higher in the first year, you can consider breaking it if you’re in, say, the fourth year of a five-year mortgage term..

Max out prepayments

If you think you might break your mortgage at some point in the future, take advantage of prepayments now. You’ll pay down your mortgage faster so when you do break it, you’ll have a smaller balance, which means less money lost to penalties.

Compare the market

When it is time to renew your mortgage, it’s in your best interest to see what else is out there. Use online comparison tools to compare mortgage rates from different providers to find the best rate for your needs.

Whatever you decide to do, run the numbers yourself and compare them to those provided by your lender. You want to make sure that you’re going to benefit from breaking a mortgage, and not just paying a lot of money in fees.