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. Most 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.



The “Comparison Rate” (indicated by the asterisk above) is the lender’s rate for the term most closely matching your remaining term. For example, if you have 22 months remaining, it is common for lenders to use the posted rate of their 2-year term as the comparison rate.

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 do not use the discount you received in their calculation, which decreases the IRD and can lower your penalty considerably.
  • When determining the comparison rate, some lenders round up your remaining months to the next longest term.  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.

Comments

  1. Comment avatar

    Hasmukh Modi    

    What is my penalty charge?????

     
  2. Comment avatar

    Victor Simone    

    Your lender is locked into earning the interest from the money they lent you. Let’s say your current mortgage rate is 4.00% and your maturity is December 2016. Well, your lender is expecting to earn that rate for the next 2 years, or maturity. If you decide to payout your current mortgage, then the lender may not be able to earn the same rate for 2 years, so they charge you the interest rate differential.

     
  3. Comment avatar

    Ann S    

    This penalty is ridiculous and astronomical. The current interest rate is comparable to the rate I have. If I pay off my mortgage early, they can certainly get the same rate. The penalty is because they gave me a rate less than standard because they wanted my business and they were competing with other lenders. Now they’re charging me based on that better-than-standard-rate. Huge and absolutely ridiculous! Tangerine and my local credit union don’t have this. Lesson learned. F you, big banks.

     
    1. Chris    

      as much as I agree that the calculations for penalties is archaic and long over due to be stream lined, all the banks do it even the credit Unions. I have not found any one that does not used the “3 months interest OR IRD which ever is greater” as their base line for Mortgage penalties.

       
      Comment avatar
  4. Comment avatar

    bruce davison    

    The wide range of formulas out there is ridiculous. There is no way an informed consumer can make proper comparison among lenders ( and no we shouldnt keep them confused just to suggest they should use knowledgeable brokers). There should be only one formula. I understand that each lender may have different costs of borrowing ( or “losses”) related to early payouts, but they then can tweak the 3 month penalty to 2 months or 6 months, to handle any variance in using a consistent and understandable IAD formula. And why has 3 months penalty been the norm for 50 years, and not 22 days or 86 days in 2015 ??
    This is a no brainer for change and is long overdue for amending

     
    1. Robert McLister    

      One penalty formula would make life so much easier, albeit take a big edge from many non-bank lenders. But the government views penalty calculations much like interest rates. As long as they’re properly disclosed, lenders can essentially set them as they please. (Whether they are routinely disclosed in an understandable way is another story.)

       
      Comment avatar
  5. Comment avatar

    Ron Butler    

    Bruce you are so right, the consumer does not have a chance to understand most Big 6 bank penalty calculations. 95% of the time the bank staff have no clue, they always tell you they need the computer to tell them.

     
  6. Comment avatar

    cellar dweller    

    Too many formulas & too many people caught with their pants down until it’s too late. If I have to sell due to unforeseen circumstances, I have to swallow whatever magical number you come up with. Unfortunately, its human nature to look at the rate today rather than the butt whipping in penalties that may or may not happen tomorrow.

    This happened to me and I became disgruntled with the nice young man at the bank…what does an obviously inflated posted rate of 5.XX% have anything to do with the real rate of 3.XX% that I received. (I know it isn’t that simple from the bank’s perspective, but recall that I’m a customer – I don’t and shouldn’t have to care…those risks/rewards should already be priced into my ‘real’ rate.)

    One penalty formula for all should be the mandate. Have the calculator posted on the FSCO website. Have everything the average home-owner needs to calculate the penalty available to them clearly on their sign up package and in the back-end of whatever website the bank or lender provides.

    No asking a clueless branch rep, phone rep or mortgage agent what my magical penalty might actually be when it comes to break. I’m a nobody on the internet and it appears that I’ve taken 5 minutes to come up with a far better solution than what is available today — at least for consumers — not so sure what the banks might say about that.

     
  7. Comment avatar

    Ross Taylor    

    Rob I really like your rough penalty calculator above. It’s a great easy to use service for our consumers. Would you make available a copy of the code upon request?

     
    1. Robert McLister    

      Thanks Ross. It was built a while back. Not sure if we still have the code but will check. It was done using a simple spreadsheet and this: http://www.spreadsheetconverter.com/

       
      Comment avatar
  8. Comment avatar

    MBroke    

    Careful what you wish for with a single penalty for all lenders. Banks don’t give away profit. Generally the more favourable the penalty, the less favourable your interest rate.

     
  9. Comment avatar

    bruce davison    

    MBroke
    I am not against charging a penalty, regardless of how large you want to make it. Since most lenders are also borrowers, they do have costs when early repayments occur. However, in this age of (full) disclosure, let’s provide a simple way for a consumer to compare options, rather than clouding payout formulas with a sense of secrecy behind computer screens and mumble jumble

     
  10. Comment avatar

    sean    

    Hi, Very interesting about terms in excess of 5 years.
    The Interest Act prohibits IRD penalties on terms over 5 years, after five years has elapsed. Have consumers had success renegotiating a new termafter paying the 3 month interest penalty?
    Thanks,

    Sean

     
  11. Comment avatar

    Pat Pelletier    

    I just landed on your page, regarding penalties. More specifically after the first 5 year term. CMHC insured mortgage. I am a broker in BC. My client’s lender wants to charge them IRD (based on bond yields). They extended the mortgage in 2015 for another 5 year term. No new money. I see that you have a link to the Interest Act – I first want to point out that it is not live. I was/am under the same assumption as you are. However lender says IRD. Realtor trying to sell called CMHC and they say Lender can charge anything they want.

    Did I miss a memo somewhere :). Rob, can you please e-mail me a copy of your response

     
    1. Robert McLister    

      Hi Pat, The 3-month interest penalty limit only applies to terms more than five years.

       
      Comment avatar
  12. Comment avatar

    Marcus    

    Hi guys, I have a ten year mortgage with street capital with an interest rate of 3.89%. There are 174 months remaining on my term…My Fiance and I are purchasing a new home and we were told by my broker initially (almost two years ago) that it was only three months interest to cancel our ten year mortgage. Since then we have gone firm on the sale of a new house and signed all the paperwork and now he is saying we have to pay using the IRD!! I have no idea how this stuff works…Anyone have any idea if hes right about the IRD and how much we will have to pay. Also since there is no 7 year mortgage from street capital does that mean they use the interest rate from the 5 year term for the IRD calculation? If so..how is that fair, its not even close to the ten year rate I got..

     
    1. Robert McLister    

      Hi Marcus, I presume you meant that your remaining amortization is 174 months. How long is your remaining term? 7 years? If so, the 3-month interest penalty limit doesn’t kick in until after five years have elapsed on the term. Cheers…

       
      Comment avatar
  13. Comment avatar

    Devs    

    Hi Guys,

    Need some help with mortgage prepayments!

    Took loan of $600000 from CIBC with 5 year fixed with 2.89%interest rate and amortization period of 25 years.

    I want to sell my property now, I have 2.5 year left to reach the 5 year fixed term.

    I am not sure of discount rates. Can anyone help me to figure out what would be a rough estimate of prepayment amount?

    Cheers!
    Devs

     
    1. Rob    

      rates are discounted from their posted rate. Today the bank rate on a 5 year fixed is 4.74. the discounted rate is 2.49%. The variance is 2.25% which means they discounted the 4.74% by 2.25% to give 2.49%.
      Each term has a different posted rate so calculation is based on your existing rate and the new posted rate (minus the variance) and discount rate….to make it confusing. Lenders do not have to have one model, too much competition out their to make a one mode system….Thus this is how lenders make money -> Happy Capitalism…

       
      Comment avatar
  14. Comment avatar

    LP    

    Call CIBC servicing at 1-888-264-6843

     
  15. Comment avatar

    Ian Baker    

    My 1st mortgage with RBC was for 5 years and I renewed for 2 years since I want to sell. That renewal will be up in July 2017. Insured by CMHC. Will I have to pay IRD if it’s sold now. Or if it doesn’t sell should I renew with varible rate?

     
  16. Comment avatar

    Ron    

    Hello Rob, thanks for this great website and penalty calculator.
    Among other things, I did not know about the prohibited IRD penalties on terms over 5 years.
    Would you have time to answer my question below?
    I have a farm and a mortgage registered for a 10 year term fixed @ 4% interest. I am almost 5 years into the term and can wait until then. The farm is a corporation. Does this rule also apply to a farm corporation or is it only for individuals? I tried to read your link: http://laws-lois.justice.gc.ca/eng/acts/I-15/ but I cannot find exactly where it is in the document. I also downloaded the PDF version: http://laws-lois.justice.gc.ca/PDF/I-15.pdf . Could you please tell me where exactly it says about this rule in the PDF document? (which page and which header?) I am sorry, I am not that good at reading these kind of documents:( Thanks a lot!!

     
    1. Robert McLister    

      Hi Ron, The sections you’re looking for are 10(1) and 10(2): http://laws-lois.justice.gc.ca/eng/acts/I-15/page-1.html#h-3

      The latter includes a corporate exception to the rule.

       
      Comment avatar
  17. Comment avatar

    Lisa Smith    

    Being immigrants to Canada we had never heard of a prepayment penalty being as high as $27,000. When we went to sell our home, we were shocked and asked BMO to work with us to lower the prepayment penalty. BMO refused saying this is the paperwork we signed. So my husband looked over in detail the paperwork, and found that BMO had actually PRINTED THE IRD FORMULA INCORRECTLY and forgot (or misused) a parentheses in the formula. Long story short it completely negated the contact, and we were able to pay the 3 month penalty instead of the $27k. I am posting this in the hope that it might help someone else who did not understand the loan process of Canada banks. GO OVER THE FORMULA IN DETAIL – it might save you some money.

     

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