Break cost or prepayment charge that can arise when a mortgage is changed or ended early.
A mortgage penalty is a cost the borrower may have to pay for breaking the mortgage contract early or for making payments beyond what the contract allows without penalty.
Mortgage penalties can cost thousands of dollars. They are one of the biggest reasons borrowers should compare more than the headline rate when choosing between open and closed products or deciding whether to refinance, sell, or switch lenders before maturity.
FCAC says a prepayment penalty may apply if you pay more than the allowed additional amount toward your mortgage, break the contract, transfer the mortgage to another lender before the end of the term, or repay the mortgage in full early, including after a sale.
In practical Canadian borrowing, the biggest contrast is usually between open and closed mortgages. An open mortgage generally allows early payout without a prepayment penalty. A closed mortgage often does not. On many closed mortgages, the penalty is calculated as the higher of three months’ interest or an interest rate differential, but the exact formula and inputs come from the lender’s contract.
Penalty should also be separated from other costs. A borrower ending a mortgage early may also face administration charges, appraisal fees, reinvestment fees, or a mortgage discharge fee.
You took a five-year closed mortgage and now want to refinance after two years because rates fell or you need equity. Before the new mortgage can replace the old one, the lender calculates a break cost under the contract. That break cost is the mortgage penalty.
Mortgage penalty is not the same as every cost of ending a mortgage. It may be only one part of the total bill.
Another mistake is assuming the penalty applies only when selling the home. It can also arise on refinance, lender switch, or oversized lump-sum prepayment.
Penalty methods, discount treatment, posted-rate comparisons, and contract language vary widely by lender and mortgage type. The real penalty comes from the signed mortgage contract and lender calculation, not from a generic rule of thumb alone.