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?”**

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. Remember: It’s total borrowing cost that matters, not just the interest rate.

**The List**

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

- Alterna Savings and Credit Union
- ATB Financial
- Blue Shore Financial
- CMLS Financial
- DUCA Financial
- Equitable Bank
- First National
- Home Trust
- ICICI Bank Canada
- intelliMortgage
- Other than its Low Rate Advantage product

- Lendwise
- Other than its Rate Plus product

- Canada Life
- Manulife Bank of Canada
- MCAP
- Merix Financial
- Other than its Rate Plus product

- RFA Mortgage Corporation
- RMG Mortgages
- Other than its Low Rate Basic product

- Street Capital
- THINK Financial
- Tangerine
- XMC Mortgages

**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.

- Most (but not all) variable-rate mortgages entail simple penalties equalling three-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).

All mainstream lenders impose IRD charges on fixed-rate mortgages, and it’s this IRD that makes penalties so expensive. Here’s an overview from the Financial Consumer Agency of Canada if you want to understand why. The problem occurs when you pick a lender that uses harsh IRD calculation methods, like many of the banks.

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 increase your mortgage borrowing without paying a prepayment charge out of pocket. Trouble is, unless they publicly advertise competitive rates you’ll likely be quoted cruddy rates on that 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.

*Note: Penalty policies vary by product. A lender can offer both fair penalty and “unfair” penalty terms. In addition, policies can change without notice or differ from what you see here. Please always confirm contractual terms directly with the lender.*

## 47 Comments

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.

Mr. CU,

Not sure what you’re referring to because First National’s prepayment charges are simple and consumer friendly.

First National’s interest rate differential (IRD) calculation is fully disclosed here: https://www.firstnational.ca/residential/mortgage-resources/mortgage-calculators/calculate-pre-payment-charges

At First National:

IRD = ( Remaining Balance x ( Contract Rate – Current Discounted Rate ) ) x Remaining Months ÷ 12

Compare that to some banks and credit unions, which use this more insidious calculation:

IRD = ( Remaining Balance x ( Contract Rate – ( Current Posted Rate – Original Discount ) ) ) x Remaining Months ÷ 12

Do you see the difference in the latter case?

Note the words “Posted Rate” and “Original Discount.” As a borrower who incurs IRD, those two phrases will cost you hundreds, thousands or tens of thousands.

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

Great work in putting this together guys.

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

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.

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.

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)

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.

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

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

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.

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.

sorry, not CIBC, HSBC branch…

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

I would remove CMLS Financial from that list. I contacted them to see what the penalty would be to break my mortgage and they quoted me an absurd number (close to 40K)…so clearly they are using the same formula as the big banks.

Hi Mat,

CMLS does not use onerous big bank penalty calculation methods, at least not for its standard prime-borrower mortgages. If you like, shoot us your written penalty quote from CMLS and we’ll happily review it for you: info@ratespy.com

Cheers…

Is Motusbank expected to become a “non-fair penalty” lender soon? I am asking because I noticed they have ‘discount’ field in their mortgage penalty calculator website (https://www.motusbank.ca/Support/Helpful-Tools/Mortgage-prepayment-calculator).

Also, is Meridian Credit Union (owner of Motusbank) a fair penalty lender?

Meridian’s penalty on fixed rates is not as bad as the major banks but it’s not as good as other lenders on this list.

Are MCAP and RMG the same lender and are their discharge rates the same and are their mortgage interest rates similar or comparable?

I meant penalty to break the mortgage and not discharge

Is Think financial a fair penalty mortgage?

How does it compare to others in the list?

@Santhosh THINK Financial is a fair penalty lender and a subsidiary of True North Mortgage. I recently got a mortgage with them through a broker and they were easy to deal with.

Can anyone chime in on THINK Financial being fair penalty? It’s hard to tell without being able to see their posted rates, and the wording on their website is confusing.

“Our IRD penalty captures the difference between your existing rate and the current rate available to new clients, minus the applicable discount you were originally given.”

Hi Doug, I believe so but will confirm.

I would also like to know about THINK Financial, they have been close to HSBC in terms of interest rate. But if they are a fair penalty lender I would sign with them in a heartbeat.

Hi Doug and Raj, Looks like the answer is yes. They use a similar penalty formula as MCAP, another fair penalty lender.

How does XMC calculate penalty charges?

Hi John, See: https://xmcmortgage.com/sp_faq/what-are-your-fees-for-paying-off-my-mortgage-early/

XMC’s regular mortgages have “reasonable discharge penalties based on discounted mortgage rates,” the company says.

Will banks waive the IRD and apply 3 months interest to keep your business? Rates have dropped so much I am planning to refinance and bank will hit me hard with IRD. I want to tell them to charge 3 months interest or I will go elsewhere for new mortgage. Thoughts?

Is Tangerine still considered a fair penalty lender? Based off their penalty calculator and their support line, it’s the “higher of either three-months’ interest or the Interest Rate Differential (IRD)” which is the same as the big-6 banks. Unless there is another criteria that makes them a fair penalty lender?

Hi Alex, Yes, Tangerine is still a fair penalty lender.

See its penalty formulas here: https://www.tangerine.ca/en/faq/answer?permaLink=how-can-i-estimate-my-prepayment-charges–generic-phone–en–0–1&responseId=219—u8rkyauASQmMPHuK8SJuXP2JRDzbbyI

What makes Tangerine a fair penalty lender is its simple IRD formula that uses your actual rate and compares it to true current rates, as published on it website: https://www.tangerine.ca/en/products/borrowing/tangerine-mortgage/

There’s no funny business from using inflated posted rates, discounts from those artificial rates or unrealistic comparison rates.

Ah, okay! It’s clear to me now. It’s not that fair penalty lenders don’t calculate IRD. It’s HOW they calculate it (standard IRD vs discounted rate IRD). The word “typically” made me think that IRD didn’t apply to fair penalty lenders…

Thank you so much for the education @The Spy!

September 28, 2020 Update:

motusbank has added posted rates to its penalty calculation effective today, the company tells us. Hence, it has been removed as a “fair penalty lender.”

How does BlueShore Financial calculate their IRD penalty?

Hi Tonya, BlueShore advertises a reasonable penalty calculation on its prime mortgages. See:

https://www.blueshorefinancial.com/ToolsAdvice/Articles/MortgagesHousing/UnderstandingPrePaymentCharges/

ThinkFinancial is not a fair penalty lender. I have myself been a victim of it.

Hi Jay, Think tells us that it uses MCAP’s penalty formula on its standard product, thus suggesting it’s a fair penalty.

They did/do have a “Skinny” mortgage that has a higher penalty. Is that the one you had?

I dont think “think financial” is a fair penalty lender anymore either. The words on their FAQ clearly mention “minus the applicable DISCOUNT you were originally given”. From what I’ve read online, the word “discount” is what some big banks use to really hose people. It’s not a straight IRD, its the IRD discounted method. See a copy/paste i wrote below

Think Financial FAQ:

How are Interest Rate Differential (IRD) penalties calculated?

Our IRD penalty captures the difference between your existing rate and the current rate available to new clients, minus the applicable discount you were originally given. It mirrors the penalty set by CMHC that we must pay to our institutional investors. The entire penalty we receive is passed through to our institutional investors.

From: https://www.thinkfinancial.ca/faqs

The wording changed if you look at the sample mortgage approval for 5 year “the works” fixed rate thats on the same FAQ website.

In the sample, it doesn’t mention the word “discount” anywhere. In the FAQ on the website, it does. Looks like it’s time to either pull them off your fair penalty lenders list, or get some clarification from them on the discrepancy.

Cheers

https://www.thinkfinancial.ca/s/THINK-WORK-5YRFIXED-20190123.pdf

Hi Dave, A lot of lenders use discounts in their IRD calculations. That alone doesn’t make them an “un-fair” penalty lender.

But just to be safe, we reached out to THINK to see if anything changed. Will advise on what they tell us.

Cheers

Here is what we are told regarding Think Financial:

To calculate IRD, THINK compares the customer’s actual contract rate to comparison rates on this page: https://www.thinkfinancial.ca/rates

For example, if someone’s balance is $100,000, their contract rate is 3% and they have 2 years to go, the interest rate differential today would be approximately equal to:

3% – 1.54% = 1.46%

multiply that x 2 years remaining

Therefore IRD = 0.0146 x 2 years x $100,000 = roughly $2,920

(It was actually a bit less than that when we ran this math by THINK.)

Based on this calculation, THINK qualifies as a fair penalty lender.

I’ve tried requesting the penalty for breaking my mortgage with meridian and they mentioned it will be based on my original loan amount and not the balance. Would you happen to know the formula they use?

Hey Dave, I’m not sure this is correct: “it will be based on my original loan amount”

We’ve tried to get a copy of Meridian’s IRD calculation with no luck. I just asked again. Will post if we get it.

I see First National is on the list as a fair penalty lender. Please can you confirm that their calculations are still ‘fair’?

I was reading somewhere else and a customer said their penalties have been high post-covid.

Do you know if they change how they calculate penalties?

Thank you

Hi Kay,

First National is still a fair penalty lender as far as we know.

Penalties have been larger mainly because short-term rates have plunged.

Meridian provided us this helpful information on it’s IRD calculation:

IRD SUMMARY:

The IRD amount is the difference between the following two amounts:

1) the contractual interest rate of the current term of your mortgage

2) the current Meridian posted interest rate for a similar mortgage.

The current interest rate for a similar mortgage is Meridian’s posted interest rate on the current date less any interest rate reduction or discount.

EXAMPLE:

Jim has a 5-year fixed-rate closed mortgage. Let’s assume that he received an interest rate discount of 2.00% when he arranged his mortgage. His existing annual interest rate on his mortgage is 3.75%. The principal amount he still owes is $100,000. Jim has two years (or 24 months) left in the term of this mortgage. However, Jim inherited some money and wants to pay his mortgage off completely.

IRD CALCULATION METHOD:

Step 1:

Start with the current mortgage interest rate: 0.0375

Step 2:

Take the current Meridian posted rate of 3.49% for a new mortgage with a term closest to the remaining term in Jim’s existing mortgage. Subtract any potential rate discounts Jim may have received on his existing mortgage. In this example, we have assumed that Jim received an 2.00% discount on his existing mortgage: 0.0149

Step 3:

The difference between Jim’s existing interest rate and the current rate: 0.0226

Step 4:

Amount Jim wants to pay: $100,000

Step 5:

Number of months left until the mortgage maturity date: 24 months

Step 6:

(Step 3 × Step 4 × Step 5) / 12

IRD = [(0.0226 × 100,000) x (24 / 12)] = $4,520

Hello

I am a first time homebuyer and am being offered the following options from Think Financial.

1.59% fixed over 5 years

1.55% closed variable over 5 years

Mortgage amount is around 600k

Given Think Financials Policies around IRD and the general economic conditions, which of the above would you suggest i go with? Do you think it makes sense to start off with variable and then lock in if rates increase?

Anyone know if People’s Bank has a fair penalty?