Mortgage prepayment penalties apply when you break your mortgage before the term ends — whether you are selling your home, refinancing for a better rate, or making a lump-sum payment beyond your prepayment privileges. The penalty compensates the lender for lost interest income.

For variable-rate mortgages, the penalty is almost always 3 months of interest — simple and predictable. For fixed-rate mortgages, lenders charge the greater of 3 months interest or the Interest Rate Differential (IRD), which can be substantially higher, especially when rates have dropped since you signed.

Big 5 banks (TD, RBC, BMO, Scotiabank, CIBC) calculate IRD using their inflated posted rates rather than your actual discount rate, making penalties significantly larger. Monoline lenders and credit unions use your actual contract rate, often resulting in penalties 50-80% lower for the same scenario.