Looking at the low mortgage rates, it is extremely tempting to consider the option of breaking your mortgage early to try and get a better rate.

If your rate is much higher than today’s rates, this might make sense, but before you make a decision be sure to research what you might need to pay in IRD (Interest Rate Differential).

What is an IRD?  

Basically, an Interest Rate Differential (IRD) is a pre-payment penalty that banks charge when you break a mortgage early.

Why is there a penalty?  

Banks charge a penalty because when they lend you money, they have actually borrowed those funds from other investors and they have guaranteed those investors a certain return over time.  So if you break your mortgage early, the bank doesn’t have enough money to pay the investors the rate they were guaranteed.  Therefore, the bank charges an IRD to make up the difference.

How much is an IRD?

The amount you pay as an IRD is affected by the current interest rates.  If rates are on the rise, the IRD is usually lower because the bank can replace your mortgage with one at a higher rate.  If rates are dropping, the bank generally charges a higher IRD.

How do banks calculate an IRD?  

The way banks calculate an IRD is complicated because it takes into account your existing rate, what current rates are, how big your balance is and how much time is left in your term.  Keep in mind there are also other facts to consider when breaking your mortgage to go to a new lender – including legal fees!

The only way to know if it makes sense to break your mortgage early, is to have an in-depth analysis done of your specific situation.  Every mortgage is different, so please call me if you’d like to take advantage of a free IRD evaluation that could help you save time and money in the long run.