3-Month Interest vs IRD: Which Penalty Will You Actually Pay?
If you have a fixed-rate mortgage and you're thinking about breaking it, you'll run into two terms: "three months' interest" and "IRD." Knowing which one applies to you — and why — can mean the difference of thousands of dollars.
The Short Answer
Your lender charges whichever of the two produces a bigger number. You don't get to choose, and neither does your lender, really — it's a "greater of" rule built into your mortgage contract and standardized by federal disclosure requirements.
Three Months' Interest: The Simple One
This applies automatically if you have a variable-rate mortgage — it's the only calculation variable mortgages ever use. It also applies to fixed-rate mortgages as the minimum possible penalty.
The math: your outstanding balance, times your annual interest rate, divided by four. A $350,000 balance at 4.5% works out to roughly $3,938.
IRD: The One That Can Surprise You
Interest Rate Differential only applies to fixed-rate mortgages. It exists to compensate your lender for the difference between the rate you agreed to pay and the rate they could get from a new borrower today, over the time you have left on your term.
Here's the pattern that matters most:
- If rates have risen since you signed → IRD comes out to zero (or negative, treated as zero), and you pay the three-months'-interest amount instead. This surprises people who assume breaking a mortgage is always expensive — sometimes it isn't.
- If rates have fallen since you signed → IRD is likely the larger number, sometimes substantially so. The bigger the rate gap and the more time left on your term, the higher it climbs.
A Real Comparison
Take a $300,000 balance, a 6% contract rate, 24 months remaining, and a current comparable rate of 4%:
- Three months' interest: $300,000 × 0.06 ÷ 4 = $4,500
- IRD: $300,000 × (0.06 − 0.04) × (24 ÷ 12) = $12,000
In this case, IRD wins by a wide margin — the lender charges $12,000, not $4,500. Reverse the rate environment (say your contract rate is 4% and today's rate is 6%) and IRD returns zero, so you'd pay the $4,500 minimum instead.
Why This Matters More Than People Expect
Two borrowers who signed identical mortgages at identical rates can end up with completely different penalties, purely based on which direction rates moved during their term, and by how much. This is also exactly why "what's my mortgage penalty" isn't a question with one universal answer — it depends entirely on timing.
One More Variable: Which Comparison Rate?
Even within IRD, lenders don't all use the same comparison rate. Big Six banks tend to use their posted rate; monoline lenders tend to use a discounted rate. The gap between those two approaches can itself be worth thousands — worth confirming directly with your specific lender rather than assuming.
This is general information, not financial advice. Try our Mortgage Penalty Calculator to see both numbers side by side for your own situation, then confirm the exact figure with your lender before making a decision.