IRD -- The Mysterious Word in Your Mortgage Commitment

All mortgage commitments have clauses about your penalty.  The penalty is charged if you pay out the mortgage prior to it’s maturity date.

Generally the lenders word the clause something like the following.

The mortgage payout penalty will be the greater of either:

  • 3 months interest based on the remaining mortgage balance on date of payout.
    Or:
  • The Interest Rate Differential also known as IRD.   IRD is the difference between your interest rate originally given when you took out your mortgage compared to what the lender could get today if they relend the money.

 

IRD can be calculated one of three ways:

Standard Rate IRD Penalty –  is the difference between your contract rate and the rate that is closest to your remaining term left on your mortgage times your mortgage  payout balance.

Discounted Rate IRD Penalty – is the difference between your contract rate and the rate that is closest to your remaining term left on your mortgage MINUS the original discount you received off their posted rate when you took your mortgage out times your mortgage payout  balance.

Posted Rate IRD Penalty – is the difference between the posted rate when you originally took out your mortgage and the rate that is closest to your remaining term times your mortgage payout balance.

The table below is fillable and can be used to give you an approximate amount of your mortgage penalty, but you should contact your lender for an accurate statement.
 
To test out your own calculations, check out the IRD Calculator.

Things to remember:

  • Lenders  may round up or down reviewing  your remaining time for their comparable rate.
  • Posted rates are what the bank charges with no discount.
  • Contract rate is the rate you receive , which may or may not be discounted.
  • IRD can only be charged on fixed rate mortgages, on Variable Rates you can only be charged 3 months interest .
  • As per the Interest Act if you take out a term that is longer than 5 years once you have completed your   payments on the first 60 months, you can only be charged a 3 month interest penalty for the remaining time.
  • Some lenders will  only allow you to break your mortgage if you sell your real estate.

 

If you are looking to purchase or refinance review your existing mortgage commitment with your Mortgage Broker and review all your options.

 

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