Prepayment penalties & the IRD
Breaking a closed mortgage before the term ends triggers a penalty, and on a fixed-rate loan that penalty can run into the tens of thousands because of how the Interest Rate Differential is calculated.
If you break a closed mortgage early, whether to sell, refinance, or move to a cheaper rate, your lender charges a prepayment penalty. On a variable-rate mortgage it is almost always simple: three months of interest, usually a few thousand dollars. On a fixed-rate mortgage, the lender charges the greater of two numbers: three months' interest, or the Interest Rate Differential (IRD). Whichever is bigger is what you pay.
The IRD is meant to cover the interest the lender loses when you leave early. It compares the rate on your contract to the rate the lender could charge today for a loan matching your remaining term, then applies that gap to your balance for the months left. The logic: if rates have dropped since you signed, the lender is losing income, so you compensate them. When rates have fallen a lot, or you have several years left, this number can balloon. On a $500,000 balance with three years remaining, an IRD penalty of $15,000 to $30,000 is not unusual.
Here is where it gets sharp. The gap in the IRD formula should compare your actual contract rate to a current rate for a similar term. Many of the big banks instead measure against their posted rate, the inflated sticker rate almost nobody actually pays. Because you got a discount off posted when you signed, using the posted rate as the starting point widens the gap and pushes your penalty higher, sometimes by thousands, than a fair calculation would produce. It is a legal practice, and the Financial Consumer Agency of Canada (FCAC) requires federally regulated lenders to disclose how they calculate it, but disclosure is not the same as fairness.
Two things worth knowing before you sign. First, the calculation method is written into your mortgage contract, so it is worth reading before you commit, not after. Some lenders (often monoline and credit-union lenders) build their IRD off discounted rates rather than posted ones, which can mean a far smaller penalty if you ever break early. Second, FCAC rules entitle you to call your lender and get your exact penalty quoted in writing before you decide anything, so you never have to guess at the number.