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Paying down your principal balance quicker than your mortgage agreement allows, or adjusting your mortgage to reflect better rates before your renewal, may seem like a great idea — but it may come at a cost. Depending on your mortgage agreement, you may face hefty prepayment penalties by breaking your mortgage contract. This is one of the great reasons why working alongside a licensed mortgage broker can significantly benefit your mortgage flexibility. They can assess your lifestyle vs. your expected lifestyle to help plan for the future and avoid or mitigate prepayment penalties when possible.
What Is a Prepayment Penalty?
Prepayment penalties are a protection lenders use to mitigate their cost of lending. Lenders charge interest on mortgages; when mortgages are approved, they're done so with the expectation that the lender will receive a certain financial return.
Borrowers sometimes encounter situations which allow them to pay down their mortgage quicker. Lenders charge prepayment penalties to allow the borrower flexibility while still receiving their expected income.
Life Is Constantly Evolving
Changes that may cause you to consider breaking your mortgage before renewal:
Mortgage Options Which Impact Prepayment Penalties
Open Mortgage — Open term mortgages are an attractive option if you believe you may experience significant life changes. You can pre-pay a portion or the entire balance without facing penalties. So why wouldn't everyone have one? Because flexibility comes at a cost — usually with a higher interest rate.
Closed Mortgage — A closed term generally offers lower rates but with less flexibility and higher prepayment penalties. Depending on the lender, a closed term may include a set number of allowable lump-sum payments called a 'prepayment privilege'.
The Importance of Prepayment Privileges
The Financial Consumer Agency of Canada (FCAC) has outlined guidelines for lenders, such as offering prepayment privileges — exceptions for amounts you can put towards your mortgage in addition to regular payments.
With prepayment privileges, you may be able to:
How a Prepayment Penalty Is Often Calculated
Prepayment penalties vary from lender to lender and may be based on:
Generally, your prepayment penalty will be whichever is higher between:
Your mortgage contract will stipulate which type of penalty you may face.
Tips for Mitigating Prepayment Penalties
Nobody enjoys extra fees:
With proper planning for the future, your chances of dodging prepayment penalties may be increased.
To discuss prepayment penalties and your mortgage options, reach out for a no-obligation call!
The information provided on this page is for educational purposes and should not be implicitly relied upon. Conditions may apply and information may not be 100% up to date. Contact a licensed mortgage professional for the most current conditions and program offerings.
Have questions about prepayment penalties: how they work & how to avoid them?
Call for a free, no-obligation consultation, or run the numbers first with the mortgage calculators.
(604) 780-5173About the author
Kyle Benzies, Licensed Mortgage Broker
I'm a licensed mortgage broker serving clients across British Columbia, Alberta, and Ontario. I work with a network of over 100 lenders — banks, credit unions, monoline, and alternative lenders — to find financing that fits each client's situation rather than a single institution's product shelf. Everything I publish here is written to explain how Canadian mortgage lending actually works, in plain language.
Published November 28, 2025
