Prepayment Penalty
Understand what a prepayment penalty is in Canadian real estate, how it’s calculated, and how to avoid costly surprises when ending a mortgage early.
May 22, 2025
What is a Prepayment Penalty?
A prepayment penalty is a fee charged by a lender when a borrower pays off all or part of their mortgage before the end of the agreed term.
Why do Prepayment Penalties Matter in Real Estate
In Canada, many mortgage agreements — especially fixed-rate contracts — include clauses that penalize borrowers for paying off their mortgage early. This could happen through refinancing, selling the home, or making large lump-sum payments outside the allowed annual prepayment limit.The penalty is usually calculated as the greater of:
- Three months' interest, or
- An interest rate differential (IRD), which compares the contract rate to current rates over the remaining term
Prepayment penalties can amount to thousands of dollars and often surprise borrowers who are unaware of the clause. Understanding the details in your mortgage contract can help you plan refinancing or selling without incurring unexpected costs.
Borrowers looking for flexibility may consider mortgages with prepayment privileges or lower penalties, and should always confirm the specific terms with their lender before signing.
Example of a Prepayment Penalty in Action
A homeowner with a fixed mortgage rate of 5% breaks their mortgage two years early. Because current rates have dropped to 3%, they owe a $7,000 prepayment penalty based on the IRD.
Key Takeaways
- Charged when paying off a mortgage early.
- Most common with fixed-rate mortgages.
- Can be calculated as three months’ interest or IRD.
- May apply when selling, refinancing, or renewing early.
- Important to review penalty terms before signing.
Related Terms
- Mortgage Term
- Refinance
- Porting a Mortgage
- Early Renewal
- Interest Rate Differential (IRD)
6525 Mississauga Road and its surrounding context. (RBC Capital Markets & CBRE)
Property details for 6525 Mississauga Road. (RBC Capital Markets & CBRE)
National average resale-price growth and housing-starts growth, smoothed over three months. The comparison illustrates the cycle; it does not establish how much a price change causes construction to change.
Trailing 12-month starts in centres of 50,000 or more remove the usual monthly seasonality. Ownership combines the homeowner and condominium categories; rental is shown separately.
Six-month averages of provincial starts, expressed at annual rates. The smoothing reduces the influence of individual apartment projects.
The same August benchmark compared with two different starting points. Three-month changes are not annualized.
Average sale prices show the difference in purchase costs across markets. They do not measure affordability relative to local incomes or construction costs.
Newfoundland and Labrador remains above its pre-pandemic sales pattern, but August activity was below last year. Historical lines retain their original release vintages.
Average and median describe different aspects of the same month’s transactions. Both are affected by the mix of homes sold.
Category averages compare different homes and locations; the gaps are not estimates of the cost to upgrade an otherwise identical property.
The five categories shown account for 5,000 of the board’s 5,057 sales. The remaining 57 transactions were in other housing categories.
Monthly observations are not seasonally adjusted. Active listings count properties available at month-end; they are not construction inventory.
Average and median prices share one dollar axis. These unadjusted transaction measures do not control for changes in the homes sold.
TRREB’s 416/905 categories compare the apartments sold in each area. The difference does not isolate a location premium for equivalent units.
5680 Oak Street in Vancouver and its surrounding context. (MCMP Architects)
Ground-level renderings of the tower proposed for 5680 Oak Street in Vancouver. (MCMP Architects)