Should I break my mortgage to get a lower rate?
If today’s rates are well below what you signed for, the math on breaking your mortgage early can work — but only after you net the penalty against the interest you’d save. The tool below works through both sides: it estimates the penalty (3 months’ interest vs IRD, with big-bank posted-rate inflation if applicable), estimates the interest you’d save by refinancing at today’s rate over the months remaining in your term, and tells you whether breaking comes out ahead.
Mortgage Break Penalty Calculator
Should you break your mortgage?
—
- Penalty to break
- —
- Interest saved (rest of term)
- —
- Net benefit
- —
Show the math
Penalty breakdown
| 3 months' interest (3MI) | — |
| Interest rate differential (IRD) | — |
| Binding formula | — |
Savings breakdown
| Rate spread (current − new) | — |
| Months remaining | — |
| Estimated interest saved | — |
Estimates only. The penalty assumes a standard IRD formula; actual lender math varies. The savings figure is balance × rate spread × months/12, a rough approximation that ignores monthly amortization. Ask your lender for a binding discharge statement before deciding.
The math behind the verdict is simple: net benefit = (balance × rate spread × months remaining ÷ 12) − penalty. If that’s clearly positive (more than ~$1,000), breaking saves real money. If it’s clearly negative, the penalty is eating the savings and you should stay. Anything within $1,000 of zero is “marginal” — get a real discharge quote from your lender before committing, since the calculator’s estimate could easily be off by that much.
A few caveats the verdict line doesn’t capture: refinancing also has closing costs (legal, title transfer, sometimes appraisal — typically $1,000–$2,000), and your new rate may extend your amortization, which trades short-term savings for long-term interest. Use this tool as the go/no-go check before you go further.
Why fixed penalties at big banks look so much worse
Variable-rate closed mortgages are simple: three months’ interest at your contract rate. Fixed-rate closed mortgages take the greater of three months’ interest and the IRD. The IRD math diverges sharply by lender:
- Monolines and credit unions typically calculate IRD as
balance × (yourRate − comparisonRate) × monthsRemaining / 12, where the comparison rate is the lender’s current rate for the term closest to your remaining months. If rates rose since you signed, this is often $0 and the 3-month formula binds. - Big-bank fixed (RBC, TD, BMO, Scotiabank, CIBC, National Bank) substitutes the comparison rate with
currentPosted − originalDiscount. Since your discount off posted at signing is usually 1.5–2 percentage points, the spread gets inflated by that amount. A penalty that would be $4,500 at a monoline can be $25,000+ at a big bank for the same loan.
Set “original discount off posted” to whatever you negotiated at signing for big-bank fixed. For a monoline or any variable mortgage, leave it at zero.
When breaking usually does not work
If you’re more than halfway through a five-year fixed at a big bank, the IRD typically dwarfs your prospective savings. Same if rates haven’t moved much — the spread is too thin to make the math work. And if you’re considering breaking just to lock in a lower rate “in case rates go back up,” you’re paying a real penalty today against an imagined risk; usually a renewal early option (some lenders let you renew up to 120 days before maturity) is the cheaper way to hedge.
The penalty figure here is an estimate. Always ask your lender for a current discharge statement before committing — they’ll give you the binding number, often by email within a few business days.