Two different moves: pay extra inside your current contract, or replace the mortgage entirely. This guide covers the prepayment privilege in your contract, how the break charge is calculated, and what refinancing actually requires — with no rate quotes and no advice on which move to make.
Applies in: across Canada
Refinancing and making extra payments are two different moves, and most of the confusion about both comes from treating them as one. Paying extra works inside the mortgage you already have. It uses a permission written into your contract, and it stays free only while you stay inside that permission. Refinancing throws the contract away and signs a new one. It can change the amount you owe, the time you take to repay it, and the rate you pay, and it can cost a prepayment charge precisely because it breaks the old contract before its term ends. This guide walks through each move in the order you would actually do it: find the permission, price the break, then decide whether replacing the mortgage is worth what it costs.
The timing is dated. On October 28, 2026, the Bank of Canada raised its policy rate by 25 basis points to 2.5 percent, with the Bank Rate at 2.75 percent and the deposit rate at 2.45 percent. The next scheduled announcement date is December 9, 2026. That decision does not set your mortgage rate, and this guide carries no mortgage rates: lender rates go stale within days, and a rate quoted last week is not an offer. Recheck the Bank of Canada decision calendar before planning around any rate expectation, and judge every offer on the numbers written in it.
Every closed mortgage in Canada carries a prepayment privilege, and every privilege is different. The Financial Consumer Agency of Canada defines the privilege as the amount you can put toward your mortgage on top of your regular payments without having to pay a prepayment charge. It can allow you to increase your regular payments by a certain percentage, make lump-sum payments up to a certain amount or percentage of the original mortgage amount, or both. The privilege varies from lender to lender, and the amount, the timing, and the conditions are in your mortgage contract.
Two documents pin it down. The first is the information box at the beginning of your mortgage agreement, where a federally regulated lender must set out the prepayment privileges, the prepayment penalties, and other key details in clear, simple language. The second arrives every year: under the code of conduct for mortgage prepayment information, lenders provide the dollar amount you can prepay each year without a charge, an explanation of how the prepayment charge is calculated, the factors that could change it, customized information about your own mortgage as of the date the statement is produced, and where to find the lender's calculator for estimating the charge. If you cannot find either document, the lender must also staff a toll-free phone line where knowledgeable staff can give you the actual prepayment charge and a written statement of it. Ask for the privilege in dollars, not as a percentage you read online. The dollar figure is the one that decides whether a payment is free.
The agency names three forms of extra payment, and each has its own catch.
Increasing your regular payments is the simplest. Even a small increase helps you pay the mortgage off faster, because the extra money goes against the balance. The catch is that you may only be able to increase your payments by a certain amount each year, and if you increase them by more than the privilege allows, you may have to pay a penalty. Normally, once you increase your payments, you cannot lower them until the end of the term. That lock-in matters: a higher payment that fits this year's budget may not fit next year's, and the contract does not let you step back down mid-term.
Making a lump-sum payment puts a chunk of money against the balance on top of your regular payments. You may only be able to put a limited amount toward the mortgage, and you can only make lump sums at the times the contract allows: before the end of your term, at the end of your term, at certain times during your term, or on certain dates set out in the contract. Check the dates before you move money. A lump sum sent on the wrong date may not count as a privileged payment at all.
Increasing the frequency of your payments is the third form. An accelerated payment option lets you make weekly or biweekly payments instead of monthly ones, and with that option you put more money toward the mortgage than with a monthly payment. The agency states the effect plainly: by accelerating your payments, you make the equivalent of one extra monthly payment per year, which saves interest over the life of the mortgage. The catch is the same as the others: the frequency change is a contract term, and the privilege limits still apply to anything beyond the scheduled payments.
One rule covers all three. Most lenders limit the allowed prepayment amount per year, and you usually cannot carry an unused amount from one year into the next. An unused privilege from last year does not add to this year's room. If you have a lump sum available near the end of a calendar or contract year, the timing of the payment decides which year's privilege it uses, so ask the lender which year a payment dated this week falls into.
A prepayment penalty, also called a prepayment charge or breakage cost, is a fee your lender may charge if you pay more than the allowed additional amount, break your mortgage contract, transfer your mortgage to another lender before the end of the term, or pay back your entire mortgage before the end of the term, including when you sell your home. If you have an open mortgage, you can make extra payments without paying a penalty. If you have a closed mortgage, the privilege is the line, and crossing it is what triggers the charge.
The calculation varies from lender to lender, and the method is stated in your contract. Federally regulated lenders must explain the method, describe the elements used to calculate the charge, and, where the calculation is complex, provide an example, an illustration, or a simplified method to help you estimate it. The charge will usually be the higher of an amount equal to three months' interest on what you still owe, or the interest rate differential, the IRD. The lender will usually use the IRD calculation when your contract rate is higher than the current rate and you signed your current contract less than five years ago.
The IRD itself is where most break costs become large. To calculate it, the lender typically uses two interest rates and works out the entire interest left to pay on the remaining term at each rate; the difference is the IRD. The first rate is either the posted rate when you signed or your current or discounted rate as described in the contract. The second rate is the current posted rate for a term of similar length, or that posted rate minus the discount you were originally offered. Which version your lender uses changes the answer, and it is the reason two borrowers with the same balance and the same remaining term can face very different charges. The agency's worked example, carried in the table above, shows the mechanism at work: a 200,000-dollar balance at 6 percent with 36 months left, against a 4 percent posted rate, produces three months' interest of about 3,000 dollars and an IRD of about 12,000 dollars, so the borrower pays 12,000 dollars plus a possible administration fee. Your charge will differ, because your balance, your rate, the time left, and your lender's comparison rate are all specific to your file and to the day the charge is calculated.
Get the number before you decide. When you confirm to the lender that you are prepaying the full or a specified partial amount, the lender must give you a written statement showing the applicable charge, how it was calculated, the comparison rate and term remaining used if the IRD was the method, the period for which the charge is valid, the factors that could change it, and any other amounts you must pay and how they are calculated. Use the lender's online calculator with your own balance and remaining term for an estimate, and use the written statement for the decision. The agency's tips for reducing the charge are practical rather than clever: use your privileges in full every year, make a lump sum before breaking where the lender allows it, consider waiting until the end of the term if the charge is large, port the mortgage if you are moving, and shop around at renewal. None of those tips requires a new product. They require reading the contract early enough to act on it.
Refinancing means ending the current mortgage and signing a new one. It is the move behind most of the reasons people break a mortgage early: rates have fallen, the household's income or family situation has changed, the home no longer meets the household's needs, or the borrower wants to borrow against equity built up in the home. The Financial Consumer Agency of Canada lists refinancing among the actions that may result in a prepayment charge, alongside prepaying more than the agreement allows and transferring the mortgage to another lender. Treat that as the starting assumption. A mid-term refinance breaks the contract, and the break charge is part of its price unless the contract says otherwise.
Because a refinance is a new mortgage, it is underwritten as one. The lender re-checks income, debts, and the property's value, and for federally regulated lenders the Office of the Superintendent of Financial Institutions expects the minimum qualifying rate to be applied to most newly underwritten mortgages. That rate is the greater of the contract rate plus 2 percent or 5.25 percent. The one exception the regulator states is the uninsured straight switch at renewal: moving the same loan amount with the same remaining amortization from one federally regulated lender to another is not expected to be stress-tested at the minimum qualifying rate. A refinance that borrows more or stretches the amortization is not a straight switch, and the qualifying rate applies. Expect the application to take the time a new mortgage takes, including an appraisal where the lender requires one, and expect the lender to set its own criteria, which may differ from the criteria your original lender used.
Refinancing to borrow against equity has its own arithmetic. Home equity is the appraised value of the home minus the mortgage balance, any home equity line of credit balance, and any other loans secured by the home. Financial institutions will usually let you borrow up to 80 percent of the home's value in total secured borrowing. The agency's example makes the rule concrete: a home worth 250,000 dollars with a 150,000-dollar mortgage has 100,000 dollars of equity, a maximum secured borrowing of 200,000 dollars, and therefore a maximum additional borrowing of 50,000 dollars. The costs of reaching that money are the break charge if the refinance is mid-term, plus appraisal, title search, title insurance, and legal fees, plus possibly a new mortgage loan insurance premium, and the lender may change the terms of the original mortgage agreement as part of the new one. The home is the security for the borrowing, which is why the agency states the other side of the same fact in one sentence: you may usually get a lower rate than with other types of loans, and you may face serious consequences, like foreclosure, if you cannot pay the money back.
Extending the amortization is often part of a refinance, and it deserves its own warning. A longer amortization lowers the regular payment, because the same balance is spread over more years. It also increases the total interest paid over the life of the mortgage, because interest is charged for longer. The agency's renewal guidance treats the trade-off as the central question at renewal: whether the budget allows higher payments to pay the mortgage off sooner and save on interest, or whether a longer repayment period is needed. Do not judge an amortization change by the monthly payment alone. Ask the lender for the total interest over the full amortization at the offered rate, and compare it with the total interest on the current schedule. A payment that falls by a few hundred dollars a month while the total interest rises by tens of thousands is a different decision from the one the payment figure suggests, and the paperwork should show both numbers before you sign.
Three products are often confused with refinancing, and each leaves the current mortgage in a different state.
A second mortgage is a second loan on the home, with the same features as a mortgage. While you pay it off, you also continue to pay off the first mortgage. Interest rates on second mortgages are usually higher than on first mortgages because they are riskier for lenders. The advantage is that the first mortgage is untouched: a low rate locked in years ago keeps running while the new borrowing sits alongside it.
A home equity line of credit, a HELOC, works like a regular line of credit secured by the home. You may borrow up to 65 percent of the home's value, borrow whenever you want up to the credit limit, pay it back, and borrow again. The rate is variable, and the lender may only require interest payments on the money used, which is why the agency warns that paying interest only means the loan is never paid down. A HELOC combined with a mortgage, sometimes called a readvanceable mortgage, increases the available credit as the mortgage principal is paid down, with the same lender. That convenience is also the risk: re-borrowing the equity created by regular payments can leave total secured borrowing high for years while the mortgage balance itself falls.
A reverse mortgage usually allows borrowing up to 55 percent of the appraised value, for homeowners who are usually aged 55 or older. Interest accumulates, the rate is typically higher than a HELOC or a mortgage, and no payments are required until the loan comes due: when the borrower moves out, sells the home, the last borrower dies, or the borrower defaults. It is a different product from a refinance, not a cheaper version of one, and the accumulated interest is the cost that decides whether it fits.
Blend-and-extend sits between the alternatives and a refinance. It is an early-renewal option in which the lender blends the old rate with the new term's rate and extends the length of the mortgage. It avoids a full break, but it locks in the blended rate and the longer term. Ask for the blended rate, the new term, and any fee in writing, and compare the total interest on the blended schedule against the cost of breaking and refinancing outright. The cheaper headline rate is not always the cheaper schedule.
Start with the contract, not with a rate. Read the information box, find the privilege in dollars, the charge method, and the remaining term, and read the annual prepayment statement for the current year's figures. Then get the written prepayment-charge statement, with the comparison rate and the validity period, before committing to anything. Use the lender's calculator for estimates along the way, and treat the written statement as the decision number.
Next, use the privilege before you break. A lump sum inside the privilege, made on a date the contract allows, lowers the balance the charge is calculated on. Ask first whether the lender restricts prepayments close to the break date, and whether a payment made now counts against this year's privilege. Then add up the whole cost of the refinance: the prepayment charge, the appraisal, the legal and title fees, the discharge and registration fees, any cash-back repayment if the original deal included cash back, and any new insurance premium. Ask the new lender whether it will pay some or all of those costs, and get the answer in writing with the offer.
Finally, check the two escape routes before you pay to break. If you are moving, ask whether the mortgage ports. If you are near the end of your term, consider waiting: at the end of the term you can prepay a lump sum without penalty, and you can change lenders without a break charge. The renewal statement must arrive at least 21 days before the end of the term for a federally regulated lender, and shopping should start a few months before that, while a switch application, an appraisal, and a registration still have time to complete. The renewal companion guide on this site covers that window in detail. A refinance done at renewal, with the amount and amortization unchanged, is a switch, not a break, and the qualifying and cost rules change with it. That distinction is the single most valuable fact in this guide: the same move costs a charge mid-term and costs none at maturity.
This guide describes process and machinery only. It does not recommend refinancing, paying extra, extending an amortization, or borrowing against equity, and it does not say whether any individual borrower can afford a higher payment or a larger loan. It does not forecast where rates are going. The Bank of Canada decision is stated as a dated fact, with December 9, 2026 as the next scheduled announcement and the recheck point for the rate context in this guide. The rules that do not expire on a decision date are the contract terms, the disclosure duties, and the qualifying rules, but the offers you receive do expire, so recheck the official pages in the Sources list before relying on any rule stated here.
Figures this guide deliberately does not carry: no current mortgage rates, no prime rate level, no typical prepayment-privilege percentage, no lender break-cost quotes, no amortization-extension dollar example, and no dollar figure for appraisal, legal, title, or discharge fees. Those numbers are specific to a lender, a contract, a province, and a day. Where this guide names a number, it is a rule, a date, or an official worked example: the October 28 and December 9, 2026 Bank of Canada dates, the 2.5 percent policy rate, the 21-day renewal statement rule, the 80 percent and 65 percent and 55 percent equity limits, the minimum qualifying rate of the greater of the contract rate plus 2 percent or 5.25 percent, and the agency's 200,000-dollar break-cost example.
| Outstanding balance in the example | $200,000 |
|---|---|
| Three months' interest at 6 percent | $3,000 |
| Interest rate differential at 4 percent comparison rate | $12,000 |
| Prepayment charge payable (the higher of the two) | $12,000, plus a possible administration fee |
This is the agency's worked example with 36 months left in a five-year term, not a quote for any real mortgage. Your charge depends on your balance, your rate, the time left, and your lender's calculation method.
Only the amount your own contract allows, and that amount varies from lender to lender. The Financial Consumer Agency of Canada calls it a prepayment privilege: the amount you may put toward your mortgage on top of your regular payments without paying a prepayment charge. It can take the form of a larger regular payment, a lump sum up to a percentage of the original mortgage amount, or more frequent payments. Your lender must tell you the yearly dollar amount of that privilege in writing, every year, and the full terms sit in the information box at the beginning of your mortgage agreement. Check the contract for the amount, the dates you may pay, and any minimum or maximum, because this guide states no typical percentage: secondary sources quote common ranges, but the only figure that governs your mortgage is the one in your agreement. Most lenders limit the allowed amount per year, and you usually cannot carry an unused amount from one year into the next.
Usually the higher of two figures: an amount equal to three months' interest on what you still owe, or the interest rate differential, known as the IRD. The Financial Consumer Agency of Canada explains that the lender will usually use the IRD calculation when your contract rate is higher than the current rate and you signed the contract less than five years ago. The IRD compares the interest left on your term at two rates and takes the difference, and lenders differ in which comparison rate they use: some use the current posted rate for a similar term, and some use that posted rate minus the discount you were originally offered, which can make the charge larger. The agency's own example puts the scale in view: on a 200,000-dollar balance at 6 percent with 36 months left, against a 4 percent posted rate for a 36-month term, three months' interest comes to about 3,000 dollars and the IRD to about 12,000 dollars, so the borrower pays 12,000 dollars, plus a possible administration fee. Do not estimate your charge from that example. Ask your lender for a written statement of the actual charge, which must describe how it was calculated, including the comparison rate and the term remaining used, and the period for which the figure is valid. Your lender must also run a calculator on its website where you can estimate the charge with your own balance and remaining term, and staff a phone line where knowledgeable staff can give you the actual charge.
The Financial Consumer Agency of Canada lists it as one of its tips for reducing a prepayment charge: use your prepayment privileges in full, and make a lump-sum prepayment before you break the mortgage, because any future charge is calculated on a lower balance. There is one catch the agency states in the same passage. Some lenders restrict your ability to prepay if you are close to the date you break the contract, so a lump sum sent at the last minute may be refused or may not reduce the charge. Ask the lender, before you send the money, whether a prepayment made now will count, and get the answer with the written charge quote. A second caution applies after the fact: if your lender lets you re-borrow amounts you prepaid, that amount is typically added back to your outstanding balance and increases your interest costs. Prepaying and then re-borrowing the same money is not progress against the balance.
Yes, in substance. Refinancing replaces your current mortgage with a new one, and the lender underwrites it as a new mortgage: income, debts, credit, and the property value are checked again. For federally regulated lenders, the Office of the Superintendent of Financial Institutions expects the minimum qualifying rate to be applied to most newly underwritten mortgages. That rate is the greater of your contract rate plus 2 percent or 5.25 percent. The exception the regulator states is the straight switch at renewal: an uninsured mortgage moved from one federally regulated lender to another with no increase to the amortization period and no increase to the loan amount is not expected to be stress-tested at the minimum qualifying rate. A refinance that increases the amount borrowed or extends the amortization is not a straight switch, so the qualifying rate applies. If your mortgage is with a provincially regulated lender, ask that lender which qualifying rules it applies, because the federal expectation may not bind it.
Financial institutions will usually let you borrow up to 80 percent of your home's value when borrowing against home equity, and the Financial Consumer Agency of Canada gives the arithmetic plainly. Home equity is the appraised value minus what you owe on the mortgage, any home equity line of credit, and any other loans secured by the home. On a home worth 250,000 dollars with a 150,000-dollar mortgage, the equity is 100,000 dollars, the maximum secured borrowing is 200,000 dollars, and the maximum additional amount is 50,000 dollars. Borrowing more than you owe also brings costs beyond the new payment: appraisal, title search, title insurance, and legal fees, a possible new mortgage loan insurance premium, and possible changes to the terms of the original agreement. A refinance is not the only way to borrow against equity. A second mortgage is a separate loan alongside the first, with both payments running, usually at a higher rate. A home equity line of credit lets you borrow, repay, and borrow again up to a limit of 65 percent of the home's value. A reverse mortgage, usually for homeowners aged 55 or older, lets you borrow up to 55 percent of the appraised value with no payments until the loan comes due, while interest accumulates at a rate typically higher than a mortgage or a line of credit. Compare those products on their own terms rather than treating them as versions of a refinance.
Blend-and-extend is an early-renewal option some lenders offer before the end of your term. The Financial Consumer Agency of Canada describes it this way: your old interest rate and the new term's interest rate are blended, and the length of your mortgage is extended. It is a way to move to a new rate without breaking the contract outright, and the blended rate and the new term are the figures to compare, not the headline rate alone. Porting is different. If you are buying a new home, ask your lender whether you can port your mortgage: take your existing interest rate, terms, and conditions with you to the new home. Porting saves you from breaking the contract and getting a new one, which is how it avoids a prepayment charge. Both depend on your lender and your contract. Ask whether your mortgage is portable before you assume it is, and ask for the blend terms in writing, including the rate, the term, and any fee, before you treat either as the cheap path.