Mortgage penalty calculator

How mortgage penalties work

Variable-rate mortgages: usually three months’ interest on the balance.

Fixed-rate mortgages: the greater of three months’ interest or the interest rate differential (IRD), which is roughly what the lender loses by re-lending your money at today’s lower rate for the rest of your term:

IRD ≈ balance × (your rate − comparison rate) × months left ÷ 12

When rates have risen since you signed, the IRD is small and you pay three months’ interest. When rates have fallen, the IRD can be several times larger.

The posted-rate trap

Many big banks compute the comparison rate as their posted rate for the remaining term minus the discount you received when you signed. Because posted rates are inflated, this can make the comparison rate low and the IRD large. Enter your original discount in the form to model it.

Ways to reduce the penalty

• Use your annual prepayment privilege first; some lenders then calculate the penalty on the lower balance.
• Port the mortgage to your new home instead of breaking it.
• Blend and extend with your current lender.
• Wait: the IRD shrinks every month as the term runs down.