IRD or Interest Rate Deferential is a formula the banks use to calculate mortgage penalty if you decide to break the mortgage with your current lender . The IRD formula is used in a case where the current posted rates are lower then your mortgage rate. This is done in order to have a bigger penalty if you are breaking your mortgage for a better rate.

No, you will not encounter any penalties if you switch from your current variable rate to a 5 year fixed rate with the same bank in Canada. The banks want you locked in to collect the interest and to have you as a long term client.

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Firstly, i live in ontario canada, so this deals with the canadian banking system. my husband and i currently have a line of credit worth $25,000 at 4.55% interest. we have a closed mortgage worth $165,000 with a term of 5 years @ 5.3% interest and an ammortization period of 25 years (we are doing accelerated weekly payments, so our mortgage can be paid off sooner). our mortgage does not come up for renewal until june 2011. it is forecasted that interest rates are going to start climbing again, likely beginning this summer...they won't climb quickly, but will start to again. at this time, we are aggressively paying down our line of credit and we expect to have it down to $10,000 by the time our mortgage is up for renewal next year. we were talking to an account manager last night, and what they recommended was that we take our line of credit, put it on our mortgage, switch to a variable rate mortgage for 5 years (so our rate would go down to prime, which is currently at 2.25%), and take the additional penalty of about $5,000 for ending the term early on the closed mortgage. the way they explained it to us was that our mortgage payments would go up slightly, but we'd be paying off so much more interest, so the penalty would be worth it to take. if we took a closed variable rate mortgage for 5 years, we'd pay whatever bank of canada prime was. if we took an open variable rate, we'd pay prime + .70%, but could easily get out of the term if we wanted to with no penalty. we're not sure what to do. is it worth it to consolodate and put our line of credit on our mortgage + take the penalty? or should we just continue chisling away at the line of credit, wait until our mortgage is up for renewal and then take a variable rate mortgage (assuming prime is still pretty low). i hope i explained it all okay, thanks for the advice in advance.

If I understand correctly, you're about 4 years into a 30 year mortgage. Several points come to mind. The first is that the only way to make a good judgment is to take ALL the costs with switching mortgages, ie the penalty for closing the first mortgage as well as all the costs for the new mortgage, which will be in the range of 3-5K, make some guesses as far as interest rates and see how the costs compare. You don't say what your current mortgage could go to, ie +2% every 5 years, etc; this will have a bearing. If you do make a switch, why aren't you considering a 15 yr mortgage? Your payments go up by 15-20%, but you pay off the mortgage in half the time. In the same vein, while paying of your line of credit is good, your mortgage is at a higher rate, I would put most of the extra money toward it. Print out an amortization schedule and look at where you are on the mortgage and see how many months you can knock off the mortgage by prepaying on it. (Look at the principal column, so for every $ extra, it makes a big difference as at that point in your mortgage, for every $1K regular payment, $100-150 is going to principal. So if you dump in $1K extra, you just shortened the mortgage by 8-10 months.