Mortgage penalty: interest rate differential or three months’ interest?

The balance times the annual rate, divided by four. On $300,000 at 4.9%: $300,000 × 4.9% ÷ 4 = $3,675.

The IRD is the gap between your contract rate and a current rate, applied to the balance and the remaining term. Two common methods:

• Standard IRD: your rate is compared with the lender’s current posted rate for a term matching the time remaining.
• Adjusted IRD: the discount you were given at the start is first taken off the current posted rate. The gap is larger, and so is the penalty.

Some lenders add reinvestment fees. Only the contract says which method applies.

Ask the lender for a written amount, with its validity date and the method. Compare it with what you save by changing loans: the calculation is in the article Mortgage penalty: calculate the cost before you switch.

Why is a fixed-rate penalty often higher?

Because the IRD is a second calculation, and the lender takes the higher of the two.

Does the IRD change when rates change?

Yes. It depends on market or posted rates: the same loan costs more to break when rates have fallen since you signed.

Can the penalty be reduced?

Sometimes: wait until the term ends, use a yearly prepayment privilege in the contract, or port the loan to a new property instead of breaking it.

Calculate a penalty