Costs and closing
Interest-rate differential (IRD)
A prepayment penalty calculated from the gap between your rate and a comparison rate, applied over the months left in your term.
Also called IRD.
The IRD compensates a lender for the interest it won't earn when you break a fixed-rate mortgage early. Roughly, it's your balance multiplied by the rate difference multiplied by the time remaining.
The rate difference is what drives the size of the penalty. Monoline lenders and most credit unions compare your contract rate to the rate they're currently offering for a similar remaining term. The big banks generally compare it to their posted rate for that term, minus the discount you originally received. That pulls the comparison rate down and widens the differential.
On a $400,000 balance with 3 years remaining, the 2 methods can produce penalties roughly $18,000 apart. And the bigger the discount you negotiated at the start, the larger a posted-rate IRD becomes.
Get the exact figure in writing from your lender before you plan around it. No calculator, including ours, can replace the lender's payout quote.
Related terms
Prepayment penalty
The charge for paying off a closed mortgage early: 3 months of interest on a variable, or the greater of that and the IRD on a fixed.
Posted rate
A lender's advertised list rate, well above what borrowers pay, and the rate some penalties are calculated from.
Discounted rate
The rate you pay after the lender's discount off its posted rate, and the rate a fair penalty calculation should use.
This definition describes how the term is used in Canadian residential mortgage lending. It’s general information, not advice on your file. Rules, thresholds and rates change. Where a figure is quoted, it’s current as of the date shown on the related guide.
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