Refinancing Penalties: How They Work and How to Reduce Them

Short answer: Break a mortgage before the term ends and your lender charges a prepayment penalty. Most variable mortgages charge three months’ interest. Most fixed mortgages charge the greater of three months’ interest or the interest rate differential (IRD), which can be much larger, especially with a lot of time left in the term. Always get a written quote from your lender. You can often reduce the penalty with prepayment privileges, porting, blend and extend, or timing the refinance near renewal.

Why Penalties Exist

When you sign a term, the lender expects interest for the full term. If you refinance, sell without porting or pay off early, the penalty covers part of that lost interest.

Two Types of Penalties

Three months’ interest

Common on variable mortgages and some fixed. Interest on your balance for three months. Predictable and usually smaller.

Example: $300,000 balance at 5% = about $3,750.

Interest rate differential (IRD)

Common on fixed mortgages. Based on the difference between your contract rate and the lender’s comparison rate for the remaining term, applied to your balance. Hard to estimate yourself and often much larger. Big bank posted rate formulas can make it larger still.

What Affects the Size

• Rate type: variable usually three months’ interest, fixed often IRD
• Time left in the term: more time, bigger penalty
• Current rates: if today’s rates are below your contract rate, IRD grows
• Lender formula: lenders calculate IRD differently

How to Find Your Penalty

Ask your lender for a written payout quote for a specific date, and confirm discharge or admin fees. Online calculators are estimates only.

When Refinancing Still Makes Sense

When the net benefit is clear: consolidating high interest debt, restructuring after separation, or moving to a product that fits your long term goals. We compare penalty plus closing costs against the benefits.

Ways to Reduce the Penalty

1. Time it near renewal to avoid or shrink the penalty.
2. Use prepayment privileges: a lump sum before breaking can lower the balance the penalty is based on.
3. Port the mortgage if you’re moving.
4. Blend and extend: combine your current rate with a new term instead of breaking.
5. Choose future products with flexibility in mind.

When the Answer Is “Wait”

Sometimes the penalty is too high for the benefit. We’ll lay out alternatives, such as a smaller line of credit or waiting for renewal, and plan a better window.

How We Help

We get your exact penalty, review your mortgage and goals, and build “do nothing”, “refinance now” and “refinance later” scenarios. Book a call.

This article is general information, not personal financial advice. Rates, rules and programs change. Talk to a licensed mortgage broker about your situation. Lacroix Mortgage Group is licensed and powered by Mortgage Connection Inc.