The Interest Rate Differential (IRD) is a type of mortgage penalty charged when a borrower breaks a fixed-rate mortgage before the term ends. It compensates the lender for the lost interest they would have earned if the mortgage had continued.
How It’s Calculated
The IRD compares your current mortgage rate to the lender’s posted rate for a new loan that matches the remaining term of your mortgage. The difference (the 'differential') is applied to your remaining balance for the time left on your term. This often results in a penalty larger than the 3-month interest method.
When It Applies
IRD penalties usually apply to fixed-rate mortgages with more than a few years left in the term. Because they can be very costly, it’s important to calculate the potential penalty before deciding to refinance or break a mortgage early.
Final Thoughts
The IRD is designed to protect lenders, but it can create significant costs for borrowers. Understanding this penalty helps homeowners make informed choices when considering refinancing or breaking a mortgage.