The 3-month interest penalty is a fee that some lenders charge if you break your mortgage before the term ends. It is equal to three months’ worth of interest payments on the remaining balance of your mortgage.
How It’s Calculated
The lender takes your current mortgage balance and multiplies it by your interest rate to find the annual interest cost. Then, it applies three months (or one quarter) of that amount as the penalty. For example, if your balance is $200,000 at 5% interest, the annual cost is $10,000, and three months’ interest would be $2,500.
When It Applies
The 3-month interest penalty is often applied to variable-rate mortgages or smaller fixed-rate loans. For larger fixed-rate mortgages, lenders may use the Interest Rate Differential (IRD) method instead, which can be higher.
Final Thoughts
The 3-month interest penalty is usually simpler and less costly than other penalty methods. Borrowers should check their mortgage agreement to understand which penalty applies before breaking their mortgage.