Interest Rate Differential
IRD
A prepayment penalty formula based on the gap between your mortgage rate and current rates, charged when you break a mortgage early.
The interest rate differential (IRD) is one of two common ways lenders calculate the prepayment penalty when you break a closed mortgage. Breaking a mortgage means renegotiating or ending the contract before the term is up. The penalty is usually the higher of three months' interest on the balance or the IRD. Open mortgages can be broken without a prepayment penalty.
The IRD compensates the lender for interest it loses when rates have dropped since you signed. The Financial Consumer Agency of Canada (FCAC) says lenders usually apply it when your rate is higher than current rates. The lender works out the interest left on your term at two rates and charges the difference.
Which two rates are used matters a great deal. The first is either your contract rate or the posted rate when you signed. The second is today's posted rate for a similar term, sometimes reduced by the discount you originally received. Because the formula depends on the rate gap and the time left, an IRD can be far larger than three months' interest. In FCAC's example, the IRD is $12,000 while three months' interest is $3,000.
Federally regulated lenders must show prepayment privileges and penalties in an information box at the start of the mortgage agreement. They must also explain how the penalty is calculated and which factors they use. Other costs can apply on top of the penalty, such as administration, appraisal or discharge fees, and repaying any cash back you received.
You can often reduce the penalty or avoid it. Use your yearly prepayment privileges, since unused amounts usually do not carry forward. Porting the mortgage to a new home can keep your rate and terms. Some lenders offer to blend your current rate with a new term's rate, without a penalty. Waiting until the term ends avoids the penalty entirely. Ask your lender to calculate the exact cost before you decide.
Sources
Last reviewed October 16, 2026.
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General information only, not legal, tax, or financial advice. Rules change and vary by province; confirm the current details with the relevant authority before you rely on them.