Mortgage Penalty in Quebec: The Math

A lender offers you a full percentage point below your current rate. Before you say yes, one number is still missing, the one nobody puts in the ad: the penalty. It cannot be guessed, it has to be calculated, and two institutions can land on wildly different amounts for the same loan. Here is the mechanism, then the Quebec fees that get added on top.

Open or closed: where the penalty for breaking a mortgage comes from

The penalty does not punish a late payment, it pays for a broken promise. The Canada Mortgage and Housing Corporation describes an open mortgage as one you can repay in full or in part at any time without penalty, usually in exchange for a higher rate. A closed mortgage does not let you repay the full balance before maturity, and its rate is lower. You traded flexibility for rate, and the penalty is the price of buying that flexibility back.

The Financial Consumer Agency of Canada gives the order of magnitude: cancelling a closed mortgage usually means paying a prepayment penalty, which can run into thousands of dollars.

One point about long terms. Section 10 of the Interest Act provides that when a mortgage on real property is not repayable before more than five years, the debtor may, once that period has passed, repay the principal and accrued interest by adding three months’ interest in lieu of notice. With a term of five years or less, that ceiling does not protect you during the term.

The two penalty formulas for breaking a mortgage

FCAC states the rule in one sentence: it is the higher of the two amounts. Either three months’ interest on the outstanding balance, or the interest rate differential. Not the average, not the one you prefer. The higher one.

FCAC adds that the differential comes into play when your mortgage rate is higher than prevailing rates and the contract is less than five years old. Hold on to the consequence: if current rates are equal to or higher than yours, the differential collapses toward zero and only the three months’ interest remains.

Your prepayment privileges, for their part, trigger nothing here. They are in your contract, and they do not apply to a full cancellation.

The interest rate differential, step by step

The method FCAC describes has five moves.

1. Take the outstanding balance.
2. Take the number of months left in the term.
3. Calculate the interest still owed at your rate.
4. Recalculate that same interest at the comparison rate the lender uses.
5. Take the difference. That is the differential.

The agency’s worked example shows the size of the gap. An outstanding balance of $200,000, a rate of 6%, 36 months left on a five-year term, a current posted rate of 4% for a 36-month term. Three months’ interest gives $3,000, that is $200,000 multiplied by 6%, divided by four. The differential gives $12,000, that is $200,000 multiplied by the 2-point gap, multiplied by the three remaining years. The penalty payable is $12,000, plus possible administration fees. Four times the expected amount.

Before you compare anything, put a number on the real payment difference with the mortgage calculator. If the savings accumulated over the months you have left do not cover the penalty and the fees, the decision is already made.

Posted rate or discounted rate: the discount that inflates the penalty

This is the part that surprises even experienced borrowers. FCAC explains that the lender compares two rates, and each one can be picked in two ways. The first is either the posted rate at the time you signed, or your actual or discounted rate, depending on what the contract provides. The second is either the current posted rate for a term of similar length, or that posted rate minus the discount you were originally given. Four combinations, four results. And the more generous the discount you negotiated at signing, the wider the gap between the original posted rate and the reduced comparison rate becomes.

An arithmetic illustration, with invented figures meant to show the mechanism. These are not market rates. A balance of $300,000, 30 months left, a contract rate of 5%, a posted rate at signing of 6.5%, so a discount of 1.5 points. Current posted rate for a comparable term: 4%.

Same loan, same day, same balance. The method chosen changes the number by a factor of four. So the question to ask is never “how much”, it is “which two rates did you use”. The posted rate against the rate you actually got is worked out in what gets decided before your mortgage rate.

Fixed or variable: what your contract decides

The two products are not penalized the same way, but not for the reason people repeat. CMHC defines a fixed-rate mortgage as one whose rate does not change during the term, and a variable-rate mortgage as one whose rate fluctuates with financial market conditions. Now, the differential compares the remaining interest at two rates set for the time that is left. On a variable rate, your rate is precisely not set, which deprives the formula of its term of comparison. Many variable-rate contracts therefore provide for the three months’ interest.

What I cannot do is present that to you as a general rule. FCAC publishes no separate scale for variable rates, and its sample information box for that product repeats the same wording as the fixed-rate one: the higher of the two amounts. Your contract decides, not the product’s reputation.

The Quebec fees: notarial deed, discharge and cancellation

Changing lenders in Quebec goes through a public officer. The Government of Quebec indicates that registrations in the Registre foncier (Quebec’s land register) are generally carried out by a notary or a lawyer, and that sales, mortgages and mortgage cancellations are among the common deeds published there. Your new lender wants a published security: a deed received before a notary, then registered.

And the old mortgage does not vanish on its own. Still according to the Government of Quebec, cancellation is not automatic, it has to be requested, and only notaries and lawyers may prepare the discharge that allows the registration to be cancelled. The registration fees for that discharge are normally yours to pay.

Two items have a public price. Here is the Registre foncier tariff in force since April 1, 2026.

The rest is not tariffed. Notary fees are not set by any public schedule: ask for them in writing before you retain anyone. On the full sequence, see the notary’s role in Quebec.

Now add it all up. Penalty, administration, appraisal, reinvestment, discharge and registration fees: that is the list FCAC asks you to have quoted before you cancel. If you received cash back at signing, a portion of it may also have to be repaid.

Three questions to ask in writing, and the cases where breaking pays

The three questions

1. What is the exact amount today, and until what date is it valid? The code of conduct applicable to federally regulated institutions provides that once your intention to repay is confirmed, the lender gives you a written statement setting out the applicable charges, the calculation method, how long the amount stays valid, the factors that could change it and any other amount owing. A number given over the phone is worth nothing.

2. Which two rates did you use, and why those? The same code provides that if the calculation rests on the differential, the written statement specifies the outstanding balance, the annual interest rate, the comparison rate used and the time left in the term. Demand those four numbers before you compare two offers.

3. Which fees get added to the penalty, item by item? Administration, appraisal, reinvestment, discharge and registration, in the same document.

When the move still holds up

You are selling. CMHC describes an assumable mortgage as an existing loan the buyer takes responsibility for, which can avoid appraisal costs and fees. Portability to your next property deserves the same question. The other items are in the real cost of selling a house in Quebec.

The couple separates. Buying out the other party’s share often requires a new loan: the penalty becomes an exit cost to budget for, not a decision. The framework is explained in separation, divorce and the home in Quebec.

You need the equity. The math changes, because you are no longer buying only a rate. Ceilings, lost insurance and fees are detailed in mortgage refinancing in Quebec.

You may not have to break anything to move. FCAC describes the blend and extend option, which extends the loan before the end of the term without a penalty, the lender blending the old rate with the rate for the new term. Its example: $200,000 at 5.5% with 24 months left, a new rate of 4% over five years, a blended rate of 4.6% over 60 months. Administration fees may apply.

Frequently asked questions

Can my bank refuse to give me the calculation before I commit? For a federally regulated institution, the code of conduct provides for a written statement once your intention is confirmed, and annual information explaining the calculation method and the factors that affect the charges. If you get put off, ask for the annual information: it does not depend on any confirmation.

My neighbour paid $2,000 and I paid $14,000. How is that possible? His penalty was probably the three months’ interest, because current rates were not lower than his. Or his contract compares the contract rate to the current posted rate, while yours starts from the original posted rate reduced by your discount.

Is it better to wait for maturity? Often, yes. At maturity, switching lenders triggers no penalty, because there is no promise left to break. What remains is the setup costs and, in Quebec, the deed and the cancellation. Compare the monthly saving multiplied by the months left against the total of penalty plus fees.

The policy rate is falling. Does my penalty fall too? Not mechanically. The Bank of Canada held its target for the overnight rate at 2.25% on September 2, 2026, with the next announcement on October 28, 2026. But the differential is calculated on posted mortgage rates for a comparable term, not on the policy rate. A drop in current rates actually has the opposite effect: it widens the gap with your rate and grows the differential.

To go further, read what gets decided before your mortgage rate and the notary’s role in Quebec.

Weighing a sale, a buyout or a refinancing on a property in Laval, Montreal or the North Shore? Reach out. The opinion of value is free and comes with no obligation.

Georges Matar

Residential Real Estate Broker · RE/MAX DU CARTIER INC.

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