So what is the difference in
the IRD penalty calculations worth to the four fixed - rate mortgage borrowers in the examples above?
Not exact matches
We found that the banks have shrunk or reduced the spreads between their Posted and Discounted rates on shorter - term mortgages over the past few years... and this has had a huge impact on Interest Rate Differential (
IRD)
penalty calculations.
Almost all of the major banks have a different
IRD calculation than other lenders which can more than double and in some cases triple the
penalty.
If / When a mortgage is broken early, the pre-payment
penalty is rarely the 3 months interest so many expect, far more often it is the
IRD — Interest Rate Differential
penalty calculation that is implemented.
For fixed rate mortgages, the
calculation of a prepayment
penalty will depend on, among other things, an
IRD calculation which for most of our customers is dependent on current interest rates (please see below if you have a Street Loyalty mortgage).
If so, the maximum interest
penalty is 3 - months interest, because the Interest Act prohibits the (usually much higher) Interest Rate Differential (
IRD)
calculation from being used.
Banks slowly changed their own policies to allow for
IRD to be charged... and today we have banks using an unfair
penalty calculation that does more than cover any potential loss... it makes the borrower pay an unfair amount!