Prepayment Penalty
Quick Definition
A fee charged by lenders when you pay off or break a mortgage before the term ends.
Full Explanation
A prepayment penalty is a fee charged when you pay off or refinance a mortgage before the end of its term. In Canada, for variable-rate mortgages, the penalty is typically 3 months' interest on the outstanding balance. For fixed-rate mortgages, it is the greater of 3 months' interest or the Interest Rate Differential (IRD) — the difference between your current rate and what the lender can lend the same amount for today. IRD penalties can be tens of thousands of dollars on large mortgages, making it crucial to consider before breaking a fixed-rate mortgage.
Related Terms
Refinancing
Replacing an existing loan with a new one, usually to get a better rate or access equity.
Mortgage
A secured loan used to purchase real estate, with the property as collateral.
Fixed Interest Rate
An interest rate that stays the same for the entire loan term.
Variable Interest Rate
An interest rate that fluctuates based on the prime rate.
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