IRD (Interest Rate Differential) is the penalty most fixed-rate mortgages charge if you break the term early. Understanding it is essential because it's often the biggest number in the refinance conversation.
What IRD Is
In plain terms: the lender is losing future interest if you break. IRD is the lender's attempt to recover that loss.
The basic formula is:
IRD = (Your Rate - Comparison Rate) x Balance x Years Remaining
The comparison rate is what makes this tricky. Different lenders use different comparison rates:
- Posted rate at signing minus today's posted rate for the closest remaining term.
- Discounted rate at signing minus today's rate (less common, broker-friendly).
- Your current rate minus today's posted rate (most common at big banks).
The comparison rate choice can swing the penalty by thousands of dollars.
IRD Vs 3-Month Interest
Every fixed-rate mortgage in Canada has two possible penalties:
- IRD - the differential math above.
- 3 months' interest - exactly what it sounds like.
The lender charges whichever is higher. For most fixed mortgages with rates much lower than current rates, IRD wins. For mortgages near the end of their term, 3-month interest often wins.
We tell you which one applies on every candidate.
How We Estimate It
For roughly 36 lenders we hold the lender's own published prepayment method plus a real rate curve, so we mirror exactly what that lender does rather than using one generic formula. We call that math sourced. For every other recognized lender the penalty is an estimate, and the candidate's rate analysis flags it so you know to double-check:
- Private and MIC lenders - we assume three months' interest, since most price prepayment that way. Flagged, because it's an assumption rather than a disclosure.
- Reverse mortgages - the real charge follows a declining percentage-of-balance schedule (often 5-8% in the early years). We floor it at three months' interest, so the figure can understate an early payoff. Flagged.
- Recognized but not sourced - we fall back to an interest rate differential against today's posted rate (no original discount credited), or a method inferred from the lender's category. Flagged to double-check.
- Unrecognized or blank lender - no method resolves at all, so we flag it to fix the lender name.
Even on a sourced lender the number stays an estimate:
- We work from your current rate, balance, months remaining, and the lender's published rate history. Months remaining is measured live to the maturity date, so it counts down as time passes rather than staying frozen at whatever it was when the mortgage was imported.
- The lender's actual quote depends on their internal comparison rate on the day of payout, which can drift slightly from public data.
See Lender-Specific Penalty Math for the full breakdown of how each level is priced and flagged.
For the most accurate estimate, use the advanced options in the penalty calculator - closing date and discount rate let us narrow in on the exact historical posted rate instead of falling back to a monthly average.
Variable Mortgages
Variable-rate mortgages don't use IRD - breaking one costs 3 months' interest, full stop.
We track a variable mortgage's rate as a spread to prime (P+ or P-) and compute the current rate from today's prime rate, so the number follows prime as it moves. The spread is editable on the candidate's detail view - flip between prime plus and prime minus with the P+/P- toggle - and the computed rate shows next to it so you always see what the penalty and savings math are using.
What To Do Next
- Run a one-off calc: Running A Penalty Calculation.
- See how lender-specific math works: Lender-Specific Penalty Math.
- Refine the estimate: Advanced Options In The Penalty Calculator.