Is It Getting More Expensive to Break Your Fixed Mortgage?
With mortgage rates dropping and many homeowners locked into rates in the 5%+ range, more and more Canadians are asking the same question: “Should I break my mortgage to refinance at today’s lower rates?”
The answer? Maybe. But there’s a catch: penalties. And lately, those penalties have gone up—dramatically.
Let’s break down why.
Variable vs. Fixed Rate Penalties: What’s the Difference?
| Mortgage Type | Typical Penalty Structure |
|---|---|
| Variable Rate | 3 months’ interest (usually based on the current prime rate) |
| Fixed Rate | The greater of 3 months’ interest or the Interest Rate Differential (IRD) |
The penalty to break a variable-rate mortgage is simple, consistent, and usually quite manageable—just three months’ interest at the current prime rate.
But if you have a fixed-rate mortgage, the penalty is often much higher—and much less transparent.
What Is the Interest Rate Differential (IRD)?
IRD is a calculation used by lenders to recover the interest they’ll “lose” if you break your mortgage early. It’s based on:
- The difference between your mortgage rate and the bank’s current posted rate for a term matching your remaining time
- The amount of time left on your mortgage
- The outstanding balance of your mortgage
Every bank calculates IRD a little differently, but most use their posted rates—and that’s where it gets complicated.
The Role of Posted Rates
Posted rates are the artificially high rates that banks publish on their websites. These are not the actual rates most people get.
| Example |
|---|
| You’re offered a 5-year fixed rate of 4.29%, but the posted rate is 5.79%. That 5.79% is what the bank uses in their penalty calculations—not the actual market rate you’re paying. |
In the past, these high posted rates helped banks offer renewal “discounts” that looked good—but weren’t actually competitive. Now they serve another purpose: increasing penalties.
What Changed Recently?
As interest rates fell over the past year, a wave of homeowners with rates like 5.29% began exploring refinancing opportunities at rates like 3.89% or 3.99%. That sparked a refinance boom.
But banks responded.
| Recent Bank Tactic | Impact |
|---|---|
| Lowered their posted rates | This increased the IRD penalty calculation dramatically. For some borrowers, penalties jumped from $8,000 to $22,000 overnight. |
| Penalty calculators updated silently | Until your discharge request is submitted, your penalty is not locked in—even if you checked it online days earlier. |
In short, banks reduced their posted rates to limit the refinancing wave—and as a side effect, penalties skyrocketed.
Should You Still Refinance?
Despite higher penalties, refinancing can still make sense—if the savings outweigh the costs.
| Scenario Example |
|---|
| You’re paying 5.29% and can refinance at 3.89%. Your penalty is $16,000, but over the next 2 years, you’d save $21,000 in interest. That’s $5,000 in your pocket—plus lower monthly payments. |
Even better: if your budget is tight, you can reamortize (extend your amortization back up to 30 years) to lower your monthly payments even more.
A Word of Caution on Reamortizing
| Reamortizing Can… | But It Also… |
|---|---|
| Reduce your monthly payment | Increases the total interest paid over time |
| Offer financial relief now | Should be considered only if necessary |
If you do extend your amortization, try to make prepayments whenever possible to offset the long-term cost.
The Bottom Line
Yes, penalties have gone up. Yes, banks have made it harder to refinance. But that doesn’t mean you shouldn’t check.
If your mortgage rate starts with a 5 and today’s rates start with a 3—run the numbers.
- Use your bank’s penalty calculator
- Compare total savings vs. the penalty
- Consider your cash flow, budget, and long-term plans
Refinancing can still be a smart financial move—even in this new penalty landscape.
Need help crunching the numbers? We’re here for that. Let’s look at your specific situation and see if refinancing makes sense for you.
