Interest Rate Differential (IRD)

Financial institutions and lenders which allow borrowers to break mortgages often charge individuals the greater of the Interest Rate Differential (IRD) or a three month interest penalty.

Interest Rate Differential is an amount calculated based on the difference between two interest rates. A lender will look at the interest rate on a borrower’s existing mortgage term.   In addition, the lender will look at the current mortgage interest rate for a mortgage term that is similar to the remaining time on the existing mortgage.

As an example, if a borrower has two years left on a five-year term, the financial institution or lender would use the mortgage interest rate that it is offering currently for a two-year term to determine the second rate for comparison in the calculation.  In some cases, a lender will negotiate a discounted interest rate.  A lender may use the posted rate at the time when an individual originally signed the mortgage agreement and compare this rate to the current rate for the term remaining.

Financial institutions and lenders are in the business of making money.  However, in some circumstances, they will work with a client in ways to reduce the prepayment charge. 

Calculation of Interest Rate Differential (IRD)

                   (B - C)

     A  x     __________      x   D

                12 months

A = Outstanding balance on mortgage

B = Annual interest rate on mortgage

C = Current market interest rate for the term closest to what is left on existing mortgage, rounding up or down

D = Number of months left until the end of term on existing mortgage

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April 27, 2017

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