If you break a mortgage early in Canada, lenders usually charge three months’ interest or IRD (interest rate differential). They sound similar, but they measure different things — and IRD is often the expensive one.
Three months’ interest: a short, predictable charge
Three months’ interest is a simple penalty:
- it uses your contract rate,
- it applies to the amount being prepaid,
- and it only covers a three-month period.
For many variable-rate mortgages, this is the dominant method. It still depends on lender rules, but it’s usually the more predictable number.
IRD: a rate-gap penalty that can jump
IRD tries to estimate the lender’s loss when your old rate is higher than today’s comparable rate for a similar remaining term.
In practice, IRD gets larger when:
- your contract rate is well above today’s rates,
- you have more time left in your term,
- your balance is still large.
That’s why fixed‑rate borrowers see bigger penalties after rates fall. The contract can say “greater of three months’ interest or IRD,” which means IRD effectively sets the final number when the gap is big.
Why the “comparison rate” matters
Most lenders don’t use the rate you see in headlines. They use a lender‑specific comparison rate based on:
- the remaining term (e.g., 2 years left → use their current 2‑year rate),
- their own posted or discounted rates,
- and their own internal formula.
This is why IRD quotes can differ between lenders for the same borrower.
When each method is likely to hurt more
- Rates flat or rising: IRD pressure is usually lower. Three months’ interest might be the bigger number.
- Rates dropped since you signed: IRD can spike quickly, especially on fixed terms.
That’s the core tradeoff: IRD penalizes you for locking a rate that’s now above market.
The practical decision moment
Homeowners typically face this when they:
- sell before their term ends,
- refinance early to get a lower rate,
- or break a mortgage to access equity.
In these cases, you need both numbers to make a real decision. If you only look at three months’ interest, you can underestimate the cost of breaking by thousands.
What to do before you decide
- Estimate both methods using a calculator.
- Request a written payout statement from your lender for a specific date.
- Confirm whether the penalty is the greater of three months’ interest or IRD.
- Ask if the quote includes admin/discharge fees and per‑diem interest.
This is the only way to compare a refinance offer or sale decision with confidence.
Bottom line
Three months’ interest is a short, predictable charge. IRD is a rate‑gap penalty that can be far larger, especially when rates have fallen since you signed. If your contract allows the lender to charge the higher of the two, treat IRD as the real risk number and confirm it with a written payout statement before you commit to breaking your mortgage.