The Guaranteed Method to Minimize Mortgage Prepayment Penalties

Breaking a mortgage happens more often than people expect. Whether you’re moving, refinancing, or taking advantage of better rates, ending your mortgage early usually comes with a prepayment penalty.

But here’s what most homeowners don’t know:

Your penalty depends on the type of mortgage you have—fixed or variable. And variable often costs a lot less to break.

When you break a fixed mortgage, your lender will charge the greater of:

• Three months’ interest, OR

• The Interest Rate Differential (IRD)

The IRD compares your current mortgage rate with today's rate for a similar term. Unfortunately, lenders often use their inflated posted rates in the calculation, which makes your penalty much higher than expected (p.s. check out our upcoming post to see which lenders charge more, including how one Big Bank makes millions off above-average prepayment penalties).

With variable mortgages, it’s simple:

• You only pay three months’ interest—no IRD, no surprises.

This usually results in thousands of dollars in savings if you ever need to break your mortgage.

Bottom line, if you think there's a good chance you'll need to break your mortgage, go for a variable rate, even if there is a small premium. (OK technically, you can enter into an open mortgage, but this situation applies for those who are definitely breaking their mortgage in the next few months. Going into an open is usually not worth it due to the high interest rates).

But what if you are already in a fixed mortgage? How can you reduce your penalty? Here's a few pointers:

✅ 1. Use Your Prepayment Privileges

Most lenders allow 10–20% extra payments each year, penalty-free. Take advantage of this to lower your balance before breaking your mortgage.

✅ 2. Time Your Break Strategically

If your term is almost up, waiting a few months could save you thousands. Penalties usually drop sharply near the end of your term.

✅ 3. Consider Porting Your Mortgage

If you’re buying a new home, ask if your mortgage is portable. This lets you carry over your rate and avoid penalties.

✅ 4. Blend & Extend

Some lenders allow you to “blend” your current rate with a new one. This can be a smart way to refinance without triggering the full penalty.

✅ 5. Work with a Mortgage Broker

Not all lenders treat penalties the same. A broker can help you choose a mortgage with the lowest risk and most flexibility—before you commit.

Rates are important—but so is your exit strategy. Choosing a mortgage with lower penalties could save you more in the long run than a slightly better rate.

Want to stop paying the bank so much money in sneaky fees? Reach out today and let me make your mortgage work for you - not against you!