That is not how the penalties are worded at all. Penalties are usually in the form of a percentage of a number of months' interest. I understand the fine is because the bank makes money on loans by being able to rely on them being a fixed long term, and the cancellation affects that, but it's not just the bank passing on that percentage loss directly.

Perhaps it's a country thing. Here in the Netherlands that is how the banks calculate the prepayment fine. You are allowed to pay off 10% to 20% of the original sum per year but over that amount you pay a "boeterente" (interest-fine). It's equal to the amount of money the bank loses by loaning your money to someone else over the remainder of the fixed period (10/20/30 years).

It's pretty ridiculous if the penalty isn't specified by the contract...

Whatever new rate you might get is not the business of your previous loan holder.

They are specified in the contract. If you sign the mortgage contract you are giving the bank steady business for the next 10 years in return of a lower rate. By breaking that 10 year agreement the bank loses money which they will charge you for.

If the early payment penalty is based on the current rate, then it's not what I mean when I say "specified by the contract".

It all depends on the contract. You can get a not-so-low rate that gives you the option of prepayment (with some fixed penalty).