Emily has a mortgage of $350,000 at a 4.5% fixed rate, with 2 years remaining on a 5-year term. She decides to sell her home and prepay the entire mortgage. Her penalty clause specifies the greater of 3 months' interest or the Interest Rate Differential (IRD). If current 2-year fixed rates are 3.0%, what is the approximate IRD penalty, assuming the bank calculates IRD using a proportional difference over the remaining term?

Question: Emily has a mortgage of $350,000 at a 4.5% fixed rate, with 2 years remaining on a 5-year term. She decides to sell her home and prepay the entire mortgage. Her penalty clause specifies the greater of 3 months' interest or the Interest Rate Differential (IRD). If current 2-year fixed rates are 3.0%, what is the approximate IRD penalty, assuming the bank calculates IRD using a proportional difference over the remaining term?

Answer options:

• Approximately $2,625 (3 months interest).
• Approximately $5,250 (3 months interest x 2). ✅ Approximately $10,500 (IRD).
• Approximately $7,000 (IRD).

Correct answer: Approximately $10,500 (IRD).

Explanation: 3 months interest = (0.045/12) * $350,000 * 3 = $3,937.50. IRD = (Original Rate - Current Rate) x Remaining Balance x Remaining Term = (0.045 - 0.030) * $350,000 * 2 = $0.015 * $350,000 * 2 = $10,500. The greater amount is $10,500.