Interest Rate Differential (IRD)
IRD is basically the loss of interest calculated over the remaining time left on the mortgage.
If you are in your first 3 years of your 5 year term and would like to refinance your mortgage to benefit from today’s low rates then you may have to pay IRD penalty which is the difference between the posted rate when you obtained your mortgage and today’s posted rate.
Here is how First Line Mortgages calculate IRD:
If your rate is 6.5% but had a discount of 0.50% therefore rate for calculation penalty would be 7%.
Let’s assume you have 4 years left in term and current posted rate for 4yrs is 5%.
Take 7 – 5 = 2% rate differential.
Take outstanding balance of say $100,000 x 0.02 (difference in rate in decimal point) = $2000 (annual interest cost)
$2000/12 = $166.67 (estimated monthly interest)
$166.67 x 48 = $8000.16 is estimated IRD cost using estimated monthly interest multiplied by 48 month left remaining in term.
THINK AHEAD!
If you have say 3 years 7 months left on your term, you would be using 4 year posted rate. But in 2 months, you will have less than 3 years and 5 months left which means the 3 year posted rate will be used.
If 3 year posted rate is less than 4 year posted rate the IRD penalty will be less.
The ‘greater of 3 months or IRD’ discharge clause is a standard amongst all the banks. By law, there must be an “escape clause”, which is that after 5 years, the discharge penalty will default to 3 months interest.
For example:
If you are in your second 5 year term of your 25 year mortgage then you have only 3 months interest penalty when refinancing your mortgage.
In either case…
This is the perfect time to refinance and lower your monthly payments!
Click here to get started.
Thank you
Joe Malek
Mortgage Agent
M08004649
Labels: Interest Rate Differential, IRD
posted by Joe Malek @ 10:56 AM
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