What is a Mortgage IRD?
Interest Rate Differential (IRD) is a charge that may apply if you pay off your mortgage before the maturity date, or pay the mortgage principal down beyond the amount of your prepayment privileges.
The IRD is based on:
The amount you are pre-paying; and,
An interest rate that equals the difference between your original mortgage interest rate and the interest rate that the lender can charge today when re-lending the funds for the remaining term of the mortgage.
If you aren’t comfortable having this penalty associated with your mortgage, you should consider a variable mortgage (only 3 months payout penalty ever).
It’s important to note that penalty amounts can change depending on how your lender calculates it.
For example: Calculations may be based on the market rate of a term equivalent to the remaining term of your current mortgage or equivalent to the original term of your current mortgage.
For fixed-rate mortgages, lenders may use the posted rate or the discounted rate as the 'market rate'.
For variable rate mortgages, 3 months interest penalty may be calculated based on the bank prime rate or your current contract rate.
Your lender may also charge additional fees. These could include:
A reinvestment fee
A discharge fee
Administrative fees
Cashback clawback
For further information regarding prepayment penalty calculation, please reach out to your lender or refer to your original loan agreement.
Let’s look at some examples:
*All examples are for illustration purposes only and may not reflect how your lender calculates IRD
Scenario 1: The Market Rate has Decreased
Details:
5.14% Interest Rate
5-years fixed term
$559,520 loan amount
After 1 year, the homeowner has made a 15k prepayment in principal. In this scenario, the market fixed interest rate has decreased to 3% and the homeowner wants to break their mortgage to secure the lower rate.
→ Assuming after 1 year, the outstanding mortgage balance is $533,125.77 (after paying down the mortgage with regular payments and a prepayment of $15K), with 4 years remaining in the term and the rates have decreased to 3%, should the homeowner decide to break their mortgage term, the prepayment penalty calculated using the IRD could be approximately *$45,635.57.
Scenario 2: The Market Rate is the Same
Details:
5.14% Interest Rate
5-years fixed term
$559,520 loan amount
After 1 year, the homeowner has made a 15k prepayment in principal. In this scenario, the market fixed interest rate has remained the same at 5.14% and the homeowner wants to break their mortgage to secure the lower rate.
→ Assuming after 1 year, the outstanding mortgage balance is $533,125.77 (after paying down the mortgage with regular payments and a prepayment of $15K), with 4 years remaining in the term and the rates have remained the same at 5.14%, should the homeowner decide to break their mortgage term, the prepayment penalty calculated using the 3 months interest could be approximately *$6,850.67.
Scenario 3: Selling Your Property
Details:
5.14% Interest Rate
5-years fixed term
$559,520 loan amount
After 1 year, the homeowner has made a 15k prepayment in principal. In this scenario, the homeowner wants to sell the property (and therefore break their mortgage contract).
→ Assuming after 1 year, the outstanding mortgage balance is $533,125.77 (after paying down the mortgage with regular payments and a prepayment of $15K), with 4 years remaining in the term, should the homeowner decide to break their mortgage term, the prepayment penalty can be the greater of: 3 months interest or Interest Rate Differential—depending on the market rates at the time of the payout.
In this scenario, to avoid a hefty penalty, the homeowner may consider 'porting their mortgage' to the new property they may be purchasing.
Estimate your IRD penalty
*Provides an estimate only and may not reflect how your lender calculates IRD
*Please make a “copy” of the Google Sheet in order to edit the calculations
