How prepayment penalties work

Know the in’s and out’s before you make a prepayment on your mortgage.

First things first, what’s a prepayment penalty?

A prepayment penalty is a fee that you, as the mortgage borrower, pay if you want to pay off part or all of your mortgage early. The penalty will vary depending on the type of mortgage you have.

Straight Rate 

With a Straight Rate mortgage you can make one prepayment per year and it can’t be more than 15% of the original principal on your mortgage. Go over that amount and you’ll have to pay a penalty.

CU Flex 

With a CU Flex mortgage you can prepay as much as you want with no penalty. There are some conditions to this rule, but they’re pretty rare. For example, if you sell your home and pay your mortgage off with the money from that sale you may face a prepayment penalty. You can also increase your regular payments to any amount you’d like.   

Variable 

Prepayments on a Variable mortgage work the same way they do on a Straight Rate mortgage. You can make one prepayment per year and it can’t be greater than 15% of the original principal on your mortgage. Saving up a lump-sum payment can be a challenge – you can avoid it by increasing your regular payments by up to 15%.


If you end up paying a prepayment penalty, it’s going to be calculated in one of two ways:

Three-month interest penalty 

You pay three months’ worth of interest on the amount that you’ve prepaid.

Interest rate differential (IRD) 

In this case, the penalty’s based on the difference between the interest rate on your mortgage and today’s rate for a comparable mortgage. If your mortgage rate is higher than what mortgage rates are today, you pay the difference between the two rates. This’ll be a percentage of the amount you prepaid, calculated for the rest of your mortgage term.

If you’re thinking about making a prepayment, call our Contact Centre at 1.866.863.6237 first to make sure you won’t be surprised with a prepayment penalty.  See our Mortgage Prepayment Penalty Calculator  to see what amount you may need to pay.