Fair Penalty Lenders: Which Lenders Have the Lowest Mortgage Penalties?

Which lenders have the best (lowest) mortgage prepayment penalties?

It’s a question we’re asked continually. So we’ve now created a list of them.

If you want to know if your lender will treat you fairly (i.e., charge you a reasonable penalty for breaking your mortgage early), read on.

What’s a “fair penalty?”

Check the mortgage penalty before you agree to any rate.

A fair penalty is a mortgage prepayment charge that reasonably compensates the lender for you breaking your mortgage contract before maturity.

That contrasts with lenders that charge more punitive penalties. In other words, penalties that are much higher than the lender’s true losses (from you breaking the mortgage early).

Despite that, most borrowers give barely a thought to penalties. That’s a mistake. The difference between “fair” and “unfair” penalties can amount to thousands, sometimes tens of thousands of dollars—especially on big mortgages.

All too often, someone will crow about saving 10 basis points off their rate ($944 of interest over five years on a standard $200,000 mortgage), only to pay a $2,000 higher penalty when they break their mortgage to refinance or move.

The List

So now that you know what’s at stake, here’s a list of Canada’s most common fair-penalty lenders:

Check the fine print to find lowest mortgage penalty lenders.Some Caveats

This is an inexhaustive list and primarily includes higher volume mortgage lenders. If you’re aware of others, let us know and we’ll add them to this list.

If you see a major lender not on this list, it likely does not have favourable penalty calculations. This includes all the big banks.

Note also that the above list applies only to:

  • fixed-rate mortgages
    • Most (but not all) variable-rate mortgages entail simple penalties equalling three-months’ interest
      .
      Spy Tip: The rough formula for calculating three months interest is:
      .
      ( balance x interest rate ) / 4
      Example:    ( $400,000 x 0.0395 ) / 4 = $3,950
      .
    • Low-frills mortgages are an exception (see the “other than” cases above for examples). They often have penalties of 2.75% to 3.00% of principal—i.e., much more than 3-months’ interest.
  • prime mortgages
    • If you get a non-prime mortgage from the above lenders, your penalty may differ.

Spy Tip: If you’re getting a variable-rate mortgage, check that the lender’s penalty is based on your “contract rate,” not on prime rate. The latter can be up to 100+ basis points higher and make a big difference (e.g., a $1,000 bigger penalty on a $400,000 mortgage).

How Fixed Penalties Work

When you terminate a fixed mortgage prematurely, lenders typically make you pay the higher of either three-months’ interest or the Interest Rate Differential (IRD).

It’s the IRD that makes penalties so expensive at some lenders. Here’s an overview from the Financial Consumer Agency of Canada if you want to understand why.

If you’re considering breaking your mortgage, estimate the prepayment charge in advance using your lender’s mortgage penalty calculator (if they have one, not all do). Then call the lender directly to verify the amount.

Spy Tip: For terms over five years, the maximum prepayment penalty is always three months’ interest, as long as you’ve made it past the 60th month.

Just because a lender has a high penalty doesn’t mean it’s a bad lender. It could have other terms that are more important to you, like a much lower rate that makes up for the penalty risk.

Some high-penalty lenders also let you add more money to the mortgage without paying a prepayment charge out of pocket. Trouble is, unless they publicly advertise competitive rates you’ll likely be quoted cruddy rates on the new borrowing (because they know you don’t want to pay their penalty to switch lenders).

At a minimum, when choosing between two mortgage deals that are fairly close, the best penalty calculation method makes a great tie-breaker.



14 Comments

  • Mr credit union says:

    I will have to definitely disagree with the list you have here . I work for a major credit union and I have seen some large penalties from First National before -far and above reasonable.

  • Mark Fields says:

    Mr. CU is probably upset that his credit union is not on the list.

    Great work in putting this together guys.

  • Lionel says:

    Thanks for this very helpful page. I was wondering do all the big banks have the same penalty formulas for variable mortgages?

    • The Spy says:

      Hi Lionel,

      No, they don’t. Some (e.g., CIBC and National Bank) base variable-rate penalties on their prime rate, not the contract rate. That makes their 3-month interest penalties relatively more expensive.

  • Matt says:

    The fact that federally regulated lenders can get away with charging excessive penalties is a testament to regulatory capture in Canada. As much as some bankers complain about regulators, the simple truth is that the consumer protection regime in Canada is laughable weak, and regulation primarily provides protective barriers to entry into the Canadian market, and a defence of the indefensibly rapacious Canadian FIs. I’ve seen my parents get ripped off by a bank [Editor note: Lender name made generic as it otherwise creates risk for the site, sorry.], and there is absolutely no meaningful recourse, other than taking their business to another awful senior citizen defrauding bank.
    The banking industry in this country is a sick disgrace that makes the used car industry look like a bastion of consumer friendly practices.

  • Lee says:

    Can you please update the article to explain to clients that the 3 months interest is not based on three months interest payments on their current payments, but three months interest based on their current balance. A lot of people get confused regarding that.

    Furthermore – if you have a variable rate, it could be calculated on the greater of the variable rate or the lenders prime rate (depending on what their contract states)

  • JW says:

    I’ve never had a client confuse the two but it doesn’t really matter. Three times the interest from your current payment is virtually the same as three month’s interest based on the current balance.

  • Nicole says:

    It was clearly mentioned in the article balance of your Mortgage multiply by your rate. Oh people,!

  • Saydul says:

    What about HSBC? They are offering 2.84% for 5-year fixed/variable closed.

  • Mark says:

    HSBC’s IRD penalty on fixed rates can be expensive, just like the six major banks. The problem is it calculates IRD using the discount you get off it’s posted rates instead of using actual discounted rates. This overinflates penalties especially when rates have dropped a lot.

  • Saydul says:

    Thanks Mark for your reply. Today I called a CIBC brach in Calgary and asked the same question. He replied that it would be the similar amount (3 months interest) for fixed term as well. Now I am planning to send them an email.

  • Saydul says:

    sorry, not CIBC, HSBC branch…

  • Tom Allan says:

    Check Encompass Credit Union in Alberta for what they offer on residential mortgage prepayment penalty. You will be pleasantly surprised.

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