Definition
The Interest Rate Differential (IRD) is the penalty formula applied when you break a fixed-rate mortgage before the end of the term. It compensates the lender for lost interest income if rates have fallen since you signed.
General formula: IRD = balance × (contractual rate – current reference rate) × months remaining ÷ 12. The "reference rate" varies by lender — at Big 6 banks, it is often the current posted rate for the remaining term ("posted-rate IRD" method), which inflates the penalty far beyond a theoretical negotiated-rate calculation.
Two common Québec pitfalls: (1) IRD can exceed CA$10,000 on a CA$400,000 balance with 3 years remaining; (2) some contracts apply IRD even on partial prepayments above the annual privilege (often 15 or 20% of balance). Always demand, in writing, the formula and a worked example before signing a long-term fixed.