Why do mortgage pre-payment penalties rise as rates fall?

With fixed mortgage rates trending lower, many homeowners are wondering if breaking their mortgage could save them money. While the idea of a lower rate is appealing, prepayment penalties—especially the Interest Rate Differential (IRD)—can be higher than expected, so it’s important to understand the costs before making any moves.

How Mortgage Penalties Work

• Variable-rate mortgages typically carry a penalty of three months’ interest.

• Fixed-rate mortgages often charge the greater of:

  • Three months’ interest, or

  • The IRD, which is based on the difference between your current rate and what your lender offers today for a mortgage with the same remaining term.

Why Penalties Rise When Rates Fall
As interest rates drop, the gap between your locked-in rate and today’s rates grows—meaning your lender stands to lose more if you break your mortgage early. That’s why IRD penalties can increase when rates decline.

Let’s Look at the Numbers Together
Breaking your mortgage might make sense—but it depends on your specific situation. I can help you calculate the potential penalty and weigh the pros and cons.

Let’s chat before you make a move—it could save you thousands.