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 the interest rate that equals the difference between your original mortgage interest rate and the interest rate that the lender can charge today( Posted Rate or Discount Rate )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 are not subject to IRD penalties.

 

Here is a calculator that let’s you estimate your mortgage penalty.

 

INTEREST RATE DIFFERENTIAL (IRD)
= (Outstanding Mortgage balance * (Existing Rate – Current Rate) * Remaining term of mortgage in Months) / 1200

For example: If John’s mortgage balance is $50000 at a rate of 6% p.a. and he wants to refinance the mortgage at a rate of 4.5 p.a. and has remaining term of 2 years, the closest estimate of penalty using above formula would be (50000 * 1.5 * 24) / 1200 = $1500.

 

 

IRD        =	Mortgage Amount	X	(Contract Mortgage Rate- Posted Rate or Current Rate)	X	Number of Months Remaining
			1200

 

 Remember: Some lenders use a different way of calculating the IRD