Mina has a fixed-rate mortgage with a remaining balance of $300,000 at a 4.0% interest rate, fixed for 5 years, with 3 years remaining. She wants to pay off the entire mortgage early. Her mortgage agreement states a prepayment penalty is the greater of 3 months interest or the Interest Rate Differential (IRD). If current 2-year fixed rates are 3.0%, how would the IRD be calculated?

Question: Mina has a fixed-rate mortgage with a remaining balance of $300,000 at a 4.0% interest rate, fixed for 5 years, with 3 years remaining. She wants to pay off the entire mortgage early. Her mortgage agreement states a prepayment penalty is the greater of 3 months interest or the Interest Rate Differential (IRD). If current 2-year fixed rates are 3.0%, how would the IRD be calculated?

Answer options:

• The difference between 4.0% and 3.0% applied to the outstanding balance for the remaining 3 years. ✅ The difference between 4.0% and 3.0% applied to the outstanding balance for the remaining 2 years.
• Three months of interest on $300,000.
• Half of the original amortization period's interest.

Correct answer: The difference between 4.0% and 3.0% applied to the outstanding balance for the remaining 2 years.

Explanation: The Interest Rate Differential (IRD) penalty is calculated based on the difference between your current mortgage rate and the current rate for a term resembling your remaining mortgage term. In this case, 3 years remaining, but the current comparison is often to a bond yield that mirrors that duration, or typically the closest lower fixed term available (e.g., 2-year fixed rate if that's the closest term remaining in your mortgage).