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Should I Break My Mortgage for a Lower Rate? Costs, Alternatives and Checklist

Updated

Breaking a mortgage means ending a closed mortgage contract before its term is up, for example to take a lower rate, borrow more, sell, or change the mortgage after a change in your life. Whether a lower rate is worth it comes down to the cost of breaking against what the lower rate saves before your term would have ended anyway. This page covers the costs, the questions to ask, and the alternatives; the break-even calculation has the arithmetic and worked examples. Both are part of the refinancing and home equity hub. If the worry is that the payment is too high for your income rather than that the rate is too high, the yardstick lenders use is the GDS and TDS ratios.

Why people break a mortgage

The Financial Consumer Agency of Canada (FCAC) lists the usual reasons to break a mortgage contract (FCAC: Breaking your mortgage contract):

  • interest rates have gone down
  • your financial situation has changed
  • you want to buy a new home and are planning on moving
  • your family situation has changed
  • your home no longer meets your needs

Whatever the reason, the same penalty rules apply: A penalty can apply when you prepay more than your prepayment privileges allow, break the contract, move the mortgage to another lender before the end of the term, or pay it off before the end of the term, including when you sell; an open mortgage can be prepaid without a penalty.

What breaking costs

On a closed mortgage the main cost to check is the prepayment penalty, which the FCAC notes can cost thousands of dollars. Breaking a closed mortgage, paying it off early or prepaying more than your privileges allow usually costs the higher of 3 months' interest and the interest rate differential (IRD) on a fixed rate, and typically 3 months' interest on a variable rate; your mortgage contract sets the exact method and comparison rate, and a federally regulated lender must tell you how it calculates the penalty. The details, with worked examples, are in how mortgage penalties are calculated, and the mortgage penalty calculator gives an estimate.

Federal law also limits the penalty on long terms. Under section 10 of the Interest Act, a mortgage that isn't due until more than 5 years after its date can be paid off at any time after those 5 years with no more than 3 months' further interest; this doesn't apply to a mortgage given by a company or other corporation.

Breaking the contract can also cost administration, appraisal and reinvestment fees and a discharge fee, and you may have to repay any cash back you received. The FCAC gives these typical amounts for the discharge:

CostTypical amount
Lender’s mortgage discharge feeWhere the fee isn’t regulated, typically ranges from no charge, up to $400 (FCAC: Discharging a mortgage)
Lawyer, notary or commissioner of oaths for the dischargeTypically between $400 and $2,500, according to the same FCAC page

The FCAC adds that you’ll usually pay fees when you set up a new mortgage, and that lenders may be willing to pay some or all of them.

If your mortgage is registered as a collateral charge and you switch lenders, you may have to pay fees to remove the charge and register the new one, and every loan secured by the collateral charge (such as a car loan or line of credit) has to be repaid or moved to the new lender (FCAC: Renewing your mortgage). See collateral vs conventional mortgages.

Does the lower rate pay for it?

Put the total cost of breaking against the interest the lower rate saves. At the same balance and amortization, the lower rate both lowers the payment and leaves a lower balance, so the saving to date has two parts:

Saving to date = monthly payment gap × months so far + (balance at the old rate − balance at the new rate)

Break-even point = the first month in which the saving to date is more than the total cost of breaking

Dividing the total cost by the payment gap alone leaves out the lower balance and puts the break-even point later than it is. Then compare the break-even point with the months left in your current term. Until the term ends you would otherwise be paying your current rate; after it ends you could renew or switch without a prepayment penalty, so savings beyond that point depend on the rate available at renewal. The break-even calculation works through two examples with the same rate drop and different penalty quotes, and shows how far the payment gap alone would misplace the break-even point.

Qualifying for the new mortgage

If you move to another lender, the new lender has to approve your application, and the FCAC lists as a con of breaking that you may no longer qualify under current economic conditions. Lenders check that you could afford the payments at the greater of your contract rate plus 2% or 5.25%, a floor set by OSFI for uninsured mortgages and by the federal government's mortgage insurance rules (the Minister of Finance's Eligible Mortgage Loan Regulations) for insured ones.

If you break to borrow more against your home, the total is capped. Under the Bank Act, a bank's loan to buy, renovate or improve a home, or a refinance of such a loan, together with any mortgage ranking equal to or ahead of it, can't exceed 80% of the home's value. The cash-out refinance guide covers that case.

Alternatives to compare

OptionWhat it doesTrade-off
Blend-and-extendYour current lender blends your old rate with a new term’s rate and extends the mortgage, with no prepayment penalty (fees may apply)The blended rate is above the rate you could get by breaking, and you commit to a new term with the same lender
PortingWhen you sell to buy another home, moves your balance, rate and terms to the new homeOnly if your mortgage is eligible; a penalty may apply if the new home costs less than the amount of your mortgage
Prepayment privilegesPays down the balance without a penalty, so a later penalty is based on a lower balanceLimited to the amount your contract allows; some lenders restrict prepaying close to the date you break
Waiting for the end of the termLets you renew or switch lenders without a prepayment penaltyYou pay your current rate until then

The porting, prepayment and waiting points come from the FCAC’s tips to reduce or avoid prepayment penalties and its page on choosing a mortgage. At renewal: If your mortgage is with a federally regulated lender, such as a bank, the lender must send you a renewal statement at least 21 days before your term ends, or tell you by then that it won't renew; the statement shows the balance, interest rate, payment frequency, term and any fees, and says the rate offered won't go up before the renewal date. The FCAC suggests starting to shop around a few months before the term ends. See the mortgage renewal guide and mortgage renewal vs refinance.

Checklist before you break

  • Get the penalty in writing from your lender and ask how it was calculated.
  • Ask about administration, appraisal, reinvestment and discharge fees, and whether the new lender will pay any of them.
  • Check whether you would have to repay cash back.
  • Find out whether your mortgage is registered as a standard or a collateral charge.
  • Work out the break-even point and compare it with the months left in your term.
  • Get a blend-and-extend quote from your current lender and compare it.
  • If you are moving, ask whether your mortgage can be ported.
  • Use any prepayment privilege you have left before the penalty is calculated, if your lender allows it.
  • Confirm you qualify for the new mortgage before you commit to breaking the old one.

Sources

The figures and rules on this page come from these sources, last checked against them between September 29, 2026 and October 1, 2026. How we check facts.