Many Ottawa homeowners only learn about prepayment penalties when they decide to sell, move or refinance. Knowing how they work before you sign helps you compare mortgages properly, because two mortgages with the same rate can have very different penalties.
How the two methods work
| Method | How it is calculated | Typical use |
|---|---|---|
| Three months’ interest | Your balance multiplied by your rate, for three months | Variable-rate mortgages, and the minimum for fixed |
| Interest rate differential (IRD) | The difference between your rate and a comparison rate, multiplied by your balance and the time left in your term | Fixed-rate mortgages |
A simple three-month example
Suppose you owe $400,000 at 5%. Three months of interest is about $400,000 × 5% × 3/12, or about $5,000. Your lender may calculate it slightly differently, so always ask for a written figure.
Why IRD penalties can be much larger
Lenders use different IRD formulas. Some compare your rate with the lender’s current rate for your remaining term. Others start from the lender’s posted rate and subtract the discount you originally received, which can produce a much larger number. Ask which formula is used before you sign.
Ways to avoid or reduce a penalty
- Use prepayment privileges. Many mortgages let you pay extra each year, often 10% to 20% of the original balance, without penalty.
- Consider portability. Some mortgages let you move your mortgage to a new home without a penalty, subject to approval.
- Time your move. Waiting until renewal avoids the penalty.
- Choose a shorter term or variable rate if you expect to move or refinance soon.
- Ask about blending. Some lenders let you blend your current rate with a new one and extend.
Before you sign a mortgage
- Ask how the penalty is calculated for fixed and variable.
- Ask for an example penalty on a realistic balance.
- Check prepayment privileges and portability.
- Compare lenders on the penalty, not only the rate.
Related: Fixed vs variable mortgages and mortgage refinancing in Ottawa.
Frequently asked questions
Do I pay a penalty if I sell my house?
Usually yes, unless your mortgage is portable and you buy another home, or you are at renewal. Ask your lender for the exact amount.
Can I negotiate a prepayment penalty?
It is difficult once you have signed. It is easier to compare and negotiate the terms before you sign the mortgage.
Do all lenders calculate IRD the same way?
No. Formulas differ, and the difference can be large. Always ask the lender to explain the method.
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