If you decide that you want to leave a closed mortgage early, be aware that you will likely incur a penalty. This penalty will be calculated in one of 2 ways:
3 months’ interest – This penalty is calculated as the interest you
would pay in 3 months at your current mortgage rate.
Interest rate differential (IRD) – The calculation for an IRD penalty can vary from lender to lender. Generally, it estimates the difference in the amount of interest the lender would receive on your remaining principle, based on current interest rates. The rate used depends on the lender, but, for example, if you have 2 years left in your term, the interest rate used would likely be the fixed 2-year closed rate. The rate may also be based on the current mortgage qualifying rate, which is the 5-year posted rate from the Bank of Canada.
Lenders will usually charge the greater of the two penalties. If interest rates are going down, IRD tends to be higher. Check the penalty with your lender before choosing a mortgage. Ask your lender to estimate the penalty if you leave mid-way through your term as an example.
Along with the penalty, other fees may apply when exiting your mortgage early, such as administration fees and an amount equal to any initial discount on the rate you received. For an exact rate and other fees check with your lender. Most major lenders also offer penalty calculators on their websites.