The IRD is a compensation charge that may apply if you pay off your mortgage prior to 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.
Most closed fixed-rate mortgages have a prepayment penalty that is the higher of 3-months interest or the IRD. Variable-rate mortgages do not have IRD penalties.
Here is a calculator that let’s you estimate your mortgage penalty.
Edit the figures in yellow and press <Tab> after each edit.
Things to note…
- The above penalties are approximate. This calculator is a rough guide only.
- Each lender has its own formula for calculating penalties.
- Some lenders use posted rates for their IRD calculation and some use discounted rates.
- Some lenders round up to the next longest term when determining comparable IRD interest rates. Some round down.
- The Interest Act prohibits IRD penalties on terms over 5 years, after five years has elapsed. In such cases, a maximum 3-month interest penalty may apply. For example, someone who has been in a 6-year mortgage for 60 months or more would pay a 3-month interest penalty (maximum) to break it before maturity.
- A small number of lenders prohibit breaking a mortgage early—regardless of the penalty—unless in the case of an approved bona fide sale.
- The moral: Always contact your lender directly for an exact penalty quote.
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