Navigating mortgage penalties at Canada’s Big Banks can be a complex and often costly endeavor. While the penalty for a variable-rate mortgage is a straightforward three months’ interest, the calculation for a fixed-rate mortgage is much more opaque. It’s almost always the greater of three months’ interest or the Interest Rate Differential (IRD).

This is where the calculation becomes difficult to understand and can lead to unexpectedly high costs. Canada’s major banks (like RBC, BMO, TD, and Scotiabank) often use a “posted rate” in their IRD calculation, which is an artificially high interest rate they publish, not the discounted rate a client actually pays. By using this inflated rate in the formula, the gap between your original rate and the current rate widens, significantly increasing the penalty you have to pay.

Furthermore, these posted rates can change at any time without notice, meaning an estimated penalty you received one day could be drastically different just a few days later, especially in a volatile rate environment. This lack of transparency and the use of high, non-market rates in the IRD calculation is a key reason why breaking a fixed-rate mortgage with a big bank can be so expensive and why the exact penalty is difficult to predict without an official payout statement.