Mortgage Penalties Explained
Confused about breaking your mortgage? Don’t worry, you won’t be the first. Here is a quick explanation of the most common two types of penalties, 3 month interest and Interest Rate Differential (IRD) . Normally you would be required to pay the GREATER of the two.
3 Months Interest
Calculated using your existing rate multiplied by the principal outstanding and 3/12.
mortgage balance x existing rate x 3/12
$275,000 x 5.95% x 3/12 = $4091
Interest Rate Differential (IRD)
Calculated as the difference between your existing rate and the rate for the term remaining, multiplied by the principal outstanding and the balance of the term.
mortgage balance x (existing rate – rate for the term remaining) /12 x (number of months remaining in term)
$275,000 mortgage balance at 5.95% with 22 months remaining.
Current 2-year rate is 3.5%.
Differential is 2.45% (5.95%-3.5%) per annum.
IRD is $275,000 x 2.45% /12 x 22 = $12,353
PLEASE NOTE: Slight variances of the the IRD calculation may occur between institutions. Always check with your lender to confirm penalty amount.