IRD vs 3 months’ interest: how mortgage prepayment penalties work

How are 3 months’ interest and the IRD calculated?

FCAC explains that the penalty is usually the higher of three months’ interest on the amount you prepay and the interest rate differential, and that the IRD is usually used when your rate is higher than the current rate and you signed less than five years ago.

• 3 months’ interest = balance × your rate × 3/12.
• IRD = balance × (your rate − comparison rate) × months remaining / 12.

FCAC’s example: $200,000 at 6%, 36 months left, and a 4% rate for a 36-month term. Three months’ interest is $3,000; the IRD is $12,000; the penalty is $12,000.

How is an IRD calculated at the big banks?

What makes IRDs differ is the comparison rate. RBC, TD, Scotiabank, BMO and CIBC describe comparing your rate with their posted rate for a term close to your remaining term, adjusted for the discount you got when you signed (CIBC adds the discount to your rate; the others subtract it from the posted rate, which comes to the same gap). BMO resolves a tie between two terms toward the higher posted rate and CIBC assigns months left to a term with its own chart. National Bank states the higher of 3 months’ interest or 1 month’s interest (max. $500) plus the interest differential, interpolated between its published terms. Many monoline lenders compare against their current offered rate instead. When posted rates sit far above offered rates, the posted-rate method produces a lower comparison rate, a wider gap and a bigger penalty.

Does your lender have to tell you how it calculates the penalty?

Under the Financial Consumer Protection Framework Regulations, a bank’s mortgage agreement must open with an information box that includes the prepayment penalty and a brief explanation of how it is calculated. FCAC says your lender must tell you how it calculates the penalty. Ask for a written payout statement before you decide.

How can you pay a smaller prepayment penalty?

• Use your annual prepayment privilege first; the penalty is then charged on a smaller balance (privileges by bank are in the comparison).
• Port the mortgage to your next home instead of breaking it (see portability).
• Ask about blend-and-extend: FCAC describes it as an early renewal where the lender blends your old rate with the new term’s rate.
• Wait: fewer months remaining means a smaller IRD, and at maturity there is no penalty.
• If your term is longer than five years, after the fifth anniversary the Interest Act (s.10) caps the penalty at 3 months’ interest for mortgages not given by a corporation.

How does the penalty change as your term runs down?

Two things shrink an IRD over time: fewer months left and a smaller balance. A third can move it either way: which posted term the bank compares you with. Posted rates for different terms don’t sit on a straight line, so crossing into a new comparison term can change the penalty more than a few months of waiting.

The table follows one mortgage: $450,000 at RBC’s 5.14% 5-year special, signed when RBC’s 5-year posted rate was 6.19% (a discount of 1.05 points), on a 25-year amortization. It shows the estimated penalty at five points in the term, first with RBC’s posted rates as they were on November 2, 2026, then with every posted rate 1 point lower.

What should you ask your bank before you break a fixed mortgage?

• A written payout statement, with the penalty, the date it is good until and every fee on it. CIBC, for example, lists a discharge and/or assignment fee when you prepay in full or transfer to another lender.
• Which posted rate and term they are comparing with, and what they recorded as your posted rate and discount at signing. The method should match the explanation in the information box at the start of your mortgage agreement.
• Whether this year’s prepayment privilege can be applied first, so the penalty is charged on a smaller balance.
• Whether a present-value adjustment applies. RBC and Scotiabank both say they discount the IRD to present value, which lowers it.
• Whether you have to repay a cash-back, and how much.
• What porting or blend-and-extend would cost instead, in writing, so you can compare all three.

Which penalty mistakes cost borrowers the most?

The most expensive one is choosing a mortgage on rate alone when there is a real chance you will move or refinance within the term. A slightly higher rate with a smaller penalty method can cost less overall; the bank vs broker calculator prices both.

Others: assuming a variable and a fixed mortgage cost the same to break, relying on a penalty quote that has expired, and breaking without checking whether waiting a few weeks would move you to a different comparison term. Run your own dates through the penalty estimator, then ask your bank for the real figure.

Worked example: one mortgage, three banks’ rules

$400,000 at 5.29% with 30 months left; the posted rate at signing was 6.89% (a 1.60-point discount). RBC rounds a tie up to its 3-year posted rate, CIBC’s chart assigns 30 months to its 2-year rate, and National Bank interpolates between its 2- and 3-year rates and adds one month’s interest (max $500).

Computed by this site’s engine from each bank’s published rates (November 2, 2026) and the rules cited below. An example, not a quote.

What this means for you

• Use this year’s prepayment privilege first; the penalty is charged on a smaller balance.
• Ask the bank which posted term it will compare with on your payout date; a month can move you to a different term.
• If your term is longer than five years, after year five the Interest Act limits the penalty to 3 months’ interest.
• Price your own case in the penalty analyzer.

Frequently asked questions