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IRD Shock

IRD-PenaltyBanks are widely expected to pass along their recent drop in funding cost to borrowers. That should take the form of lower fixed mortgage rates.

Once that happens, some folks will face much larger penalties for breaking their mortgage early.

Generally, as fixed rates drop, interest rate differential (IRD) penalties grow bigger.

Here’s an example…

Suppose you got a 5.50% five-year fixed mortgage three years ago from a Big 5 bank. Assume you received 1.35% off posted rates and have a $300,000 balance today.

If banks drop 2-year posted fixed rates by 35 basis points, that could boost your IRD penalty by roughly $2,400! (The 2-year term is used as a comparison rate because you’d have two years remaining till maturity.)

If you’re breaking a fixed-rate mortgage imminently, you’d be well served to get a discharge statement from your existing lender immediately.

With a discharge statement in hand, you can potentially lock in your IRD penalty for anywhere from 5-30 days (or whatever your lender’s policy is).

Note:  Depending on who your mortgage is with, it’s possible you won’t be able to lock in your penalty until the lender processes your discharge request. That could take up to 5-6 business days in some cases. Consumer-friendly lenders lock in your penalty as of the date you send the discharge request.

IRD typically only applies to closed fixed mortgages, but there are some lenders who also apply it to their variable-rate mortgages. Not cool.


Rob McLister, CMT