What is the three-month interest penalty for breaking a variable mortgage in Ontario?

When you break a variable-rate mortgage before its term expires, Canadian lenders typically calculate the prepayment penalty as three months' interest on the outstanding balance. This is the standard penalty for variable-rate products and is generally straightforward to calculate: take your outstanding balance, multiply it by your current interest rate, divide by twelve, and multiply by three.

For example, on a large balance, three months of interest can still amount to thousands of dollars. The exact calculation uses the rate you are actually paying at the time you break the mortgage, so if rates have risen since you took out the mortgage, the penalty will be higher than it would have been at your original rate.

It is important to confirm the penalty calculation with your lender in writing before signing anything, because lender methodology can vary slightly. Ask for the exact penalty number on the specific date you intend to break. Also consider whether there are any administration fees charged in addition to the interest penalty. Comparing the penalty to the potential savings from a lower rate at a new lender — or from selling versus holding — will tell you whether breaking makes financial sense. Your mortgage broker and lawyer can help you model this.