Breaking a Mortgage: Penalty, Savings and Break-Even Point
Compare the exit penalty with the actual interest savings and calculate the break-even point before breaking your mortgage.
Published 2026-07-21
Breaking a mortgage mid-term can be the best or worst financial decision of the year, and the difference lives in three numbers. The penalty first: three months' interest or the rate differential depending on the contract — an amount that moves week to week and gets requested in writing. The savings next: the rate gap applied to the balance, net of notary and appraisal fees. The break-even point last: the month where accumulated savings overtake the exit bill, compared honestly with how long the property and the loan will actually be kept. A prepayment privilege used before the break shrinks the penalty itself, a detail often worth hundreds of dollars. This article walks through the complete calculation, the questions to put to the lender and the situations where waiting out the term beats every possible break — because the cheapest penalty is the one never paid.
Get the real penalty, in writing
The break penalty is calculated per the contract: generally three months' interest or the rate differential, whichever is higher on a fixed rate. The differential depends on the lender's posted rates on the calculation day, which produces two practical consequences: the amount changes week to week, and the figure quoted by phone is only an estimate. Request the detailed calculation in writing, with the formula, the rates used and the validity date. Some lenders use their posted rate rather than the rate actually granted in the differential, which inflates the bill considerably: that is exactly the kind of detail discovered in the written calculation, never in the conversation. The number that counts is the one that would be withdrawn at the notary's office.
Calculate the net saving, not the rate gap
Seeing your rate next to the market's impresses; the net saving decides. Multiply the gap by your balance for the gross annual saving, then subtract everything the break costs: the penalty, notary fees if you switch lenders, the appraisal, and any file charges. Check whether the new lender absorbs part of these costs — a commitment to obtain in writing. The saving that survives these subtractions is the only real one. A one-point gap on a large balance can justify an imposing penalty; the same gap on a modest balance late in the amortization sometimes does not even pay the notary. The calculation is done in dollars, on your numbers, never on the advertisement's.
Shrink the penalty before breaking
The penalty is calculated on the balance: reducing it before the break reduces the bill. Your prepayment privilege, often ten to twenty percent of the loan per year, applies penalty-free; used the day before the break, it removes its share from the calculation. Check the annual limit, the reference period and any carry-forward of unused room: a payment in December and another in January can double the available space. Some borrowers also time the break to a maturing GIC or an expected windfall reserved precisely for this move. Every dollar of balance removed before the calculation works twice: it cuts the penalty today and the interest forever.
Place the break-even on your own calendar
Break-even arrives the month accumulated savings overtake the exit bill: divide the break's total cost by the net monthly saving to find it. That number means nothing in the abstract; it compares against your real calendar. If you sell or renew before the break-even, the break costs more than it saves, however handsome the new rate. A twenty-four-month break-even requires keeping the property and the loan at least two years; a plausible move, a job transfer, a separation in progress all change the verdict. Document the full calculation, with its dates and assumptions: it is what will answer, two years from now, the question of whether you did the right thing.
Quebec scenario: compare before confirming
A borrower in Gatineau holds a 5.9% fixed rate for another 26 months and sees offers at 4.6%. His bank calculates the penalty using the interest rate differential: $6,400, payable on the payout date. The interest savings at the new rate come to about $250 a month, but he has to subtract the penalty, notary and appraisal fees. Break-even lands around month twenty-four: if he sells or renews before then, breaking costs more than it saves. Before deciding, he uses his 15% prepayment privilege to shrink the balance, which lowers the penalty itself. Since he plans to keep the house at least five years, he breaks the mortgage and documents every figure in the calculation. He also asks the bank to confirm the penalty in writing on the payout day itself, because the differential moves with posted rates and the figure quoted a month earlier is only an estimate. The amount finally withdrawn at the notary is the one that belongs in his break-even file, next to the dated rate offers.
Checklist
- Request the exact penalty amount in writing
- Verify the applicable formula, three months or differential
- Use the prepayment privilege before breaking
- Price the interest savings at the new rate
- Add notary, appraisal and exit fees
- Calculate the break-even point in months
- Compare it with how long the loan will really be kept
- Redo the math if rates move before signing
- Document every figure in the decision file
Frequently asked questions
How is my penalty calculated?
According to your contract: usually three months' interest or the interest rate differential, whichever is higher on a fixed rate. The differential depends on posted rates on the day of calculation, so request the exact amount in writing — it changes from week to week.
Can I shrink the penalty before breaking the mortgage?
Often, yes. Use your prepayment privilege first to lower the balance: the penalty is then calculated on a smaller amount. Check the privilege's annual limit and when it resets before sending the payment.
When does breaking become worthwhile?
At the break-even point: when the accumulated interest savings exceed the penalty and fees. Calculate it in months, then compare it with how long you will actually keep the property and the loan. If you sell or renew before that point, breaking costs more than it saves.