The IRD is what the banks charge 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 scariest part about Interest Rate differentials is that each lender has their own formula for calculating them.

I don’t know how many times I’ve heard the comment “nobody explained it to us” or “we were told it was only a 3 month interest penalty”.

As much as I agree there should be some type of penalty, it’s very unfortunate when a lender doesn’t play fair.

By fair I mean, compare apples to apples.

Quite often the lender can’t even give an exact calculation on how they arrived at their figure.

They’re also required to reduce the penalty by the prepayment amount, but some don’t.

Let’s say you’re two years into a 5 year mortgage term of $350,000 with a fixed interest rate of 5.5% and you need some cash to do a renovation or consolidate some debt.

This will require that you to break your current mortgage in favour of a new one.

The bank’s position is that you still have 3 years or 36 months (3×12) more payments at a rate of 5.5%

This is where it can get UGLY & possibly even UGLIER

Because you have 3 years left, they compare their current 3 year rate to the rate you have. The lower the rate they use for this 3 year comparison, the LARGER the penalty. Then there’s the horror story where it gets even UGLIER, where they add in very small print that they’re using the rate that they originally gave you PLUS any discount they gave you at that time. So if they gave you 1.5% off when you originally got your mortgage, well, they’re also going to add that to the differential.

Obviously, this is MOST painful in a declining interest rate environment.

The Financial Consumer Agency of Canada (FCAC) has information on mortgage penalties here.

Should you break your mortgage in favour of a lower interest rate?

There’s no one size fits all answer to this question. It really depends on so many variables.

BUT, I’ve got Good news and I’ve got Good news….

The good news is, the answer is FREE.

The other good news is, I’ve seen VERY large penalties where it STILL makes sense to break & refinance.

Make sure you get The Right Advice at The Right Time…

Simply call me at 604-273-2002 or email me at

mark [at] notapennydown.com

PS – You may be interested to know that CMHC use to have a rule whereby lenders could ONLY charge a 3 month interest penalty. For whatever reason, they pulled the plug on that back in 1999. Now lenders are free to do as they please. Finance Minister Jim Flaherty has said he will standardize how prepayment penalties are calculated and disclosed to consumers, but details have not yet been revealed.

Please leave your comments below.

Mark Fidgett
Vancouver Mortgage Broker
Owner www.NotaPennyDown.com
604-273-2002