A lower rate can be attractive, but the payout charge and other costs can consume the benefit. Obtain a dated quote, choose a comparison period and account for both interest and the balance remaining.
Begin with the written payout quote
Closed mortgages can charge for repayment beyond the contract’s privileges or for ending the loan early. The method varies by lender and agreement; three months’ interest and an interest rate differential are common concepts, not interchangeable universal formulas. FCAC’s prepayment-penalty guide explains why the contract and calculation method matter.
Ask for a quote for the date you expect to close. Identify the mortgage balance, penalty, discharge charge, other fees and any cash-back repayment separately. Breaking a contract can involve additional costs beyond the penalty. FCAC’s guide to breaking a mortgage outlines the possible charges.
Why a quick IRD estimate can be wrong
An interest rate differential compares interest amounts using rates selected under the lender’s method. Posted rates, discounts and the remaining term can affect those inputs. Two mortgages with the same customer rate can therefore produce different payout quotes. See FCAC’s explanation of IRD inputs.
Use an online penalty estimate to prepare questions, then reconcile it with the lender’s dated statement. If the numbers disagree, request the balance, rate assumptions, time remaining and applicable privilege used in the calculation. Do not substitute a generic formula for an unexplained quote.
An original 24-month comparison
Assume $400,000 remains with 25 years of amortization. The current rate is 5.50%; a proposed replacement is 4.50%. Both examples use monthly payments and nominal annual rates compounded semi-annually. Hold those rates constant for the next 24 months and assume no extra payments.
| Over the next 24 months | Keep current mortgage | Replace mortgage |
|---|---|---|
| Monthly payment | $2,441.57 | $2,213.89 |
| Approximate interest | $42,691 | $34,900 |
| Approximate ending balance | $384,093 | $381,767 |
The illustrated interest difference is about $7,791. If a hypothetical written quote lists a $6,000 penalty and $1,000 of other costs, paid from cash, the net interest benefit over this period is only about $791. That small margin deserves careful checking.
Keep the comparison honest
A lower payment alone is not the saving. Extending amortization can lower the payment while leaving more debt. Likewise, adding the payout costs to the new mortgage increases the opening balance and introduces interest on those costs; the example above does not finance them.
Use the same end date for both choices. Include known expenses, realistic planned prepayments and any expected sale or refinance before that date. If the replacement product is variable, run more than one rate path instead of presenting a constant-rate calculation as a forecast.
Compare the alternatives
Ask about waiting until maturity, permitted prepayments, or an available portability or renegotiation option. Price each alternative separately. In the residential calculator, compare the revised balance and payment, then reconcile the cash required with the lender’s payout statement. The lender’s actual quote determines the penalty.
Put the figures into a scenario
Use the appropriate assumptions, compare the results and save a summary for your file.
Open the Residential Calculator →Sources and review
References checked September 22, 2026. Examples are illustrative; confirm the lender, insurer and program requirements for your situation.