What is IRD (Interest Rate Differential) in Canadian mortgages?
A prepayment penalty charged by lenders when breaking a fixed-rate mortgage before maturity. Calculated as the difference between your contract rate and the lender's current posted rate for the remaining term.
Why IRD matters
The interest rate differential is usually the larger of the two fixed-rate penalty calculations when rates have fallen since the mortgage started. Lenders do not calculate it the same way, so two lenders can charge very different amounts for the same situation.
How is IRD calculated?
IRD example
Worked example
$500,000 mortgage at 5.5%, 3 years remaining, current 3yr posted rate 4.0%: IRD = $500,000 × 1.5% × 3 = $22,500.
How brokers use IRD
- Ask whether the lender compares your contract rate with its posted rate or with the rate it would currently offer. Posted-rate methods can produce a larger penalty.
- The remaining term is matched to the lender's current rate for that term, so a mortgage with several years left is compared with a longer-term rate.
- Use the lender's written figure for any advice. The formula on this page is an approximation.
- Compare the IRD with three months of interest, because the lender charges whichever is greater on a fixed rate.
More questions about IRD
When is the IRD bigger than three months of interest?
Usually when rates have fallen since you took the mortgage and there is a long time left in the term. The bigger the gap between your rate and today's rate, the bigger the IRD.
Do variable-rate mortgages have an IRD?
Usually not. Variable-rate mortgages typically carry a penalty of three months of interest.