Penalty

Definition

The amount charged when a closed mortgage is repaid, refinanced, or switched before the end of the term. On a variable rate, it is generally three months’ interest. On a fixed rate, it is the higher of three months’ interest and the interest rate differential (IRD), which compares your rate with the rate the lender could get today for the remaining term. Example: $350,000 balance, 5% fixed, 30 months left. Three months’ interest comes to about $4,400. If the lender calculates the IRD from a 3% posted rate for the remaining period, the penalty can exceed $17,000. Two lenders calculate the IRD differently, mainly on the comparison rate used; the formula is in your agreement. Always ask for a written amount for a specific date before deciding.