What is a potential penalty for paying off a mortgage early?

Paying off a mortgage early can often incur a penalty, and the specific way this penalty is calculated is relevant here. The option indicating that the penalty could be the greater of Interest Rate Differential (IRD) or three months' interest reflects a common practice used by lenders to calculate early repayment costs.

IRD is used when there is a difference between the original interest rate of the mortgage and the current interest rates available. When borrowers pay off their mortgage early, lenders may lose out on future interest income, and so they calculate a penalty based on either how much interest would have been paid if the mortgage had continued or a fixed period interest such as three months.

This method provides a more balanced approach that takes into account market conditions and the potential losses to the lender, making it a logical and common form of penalty for early repayment. The other options do not accurately reflect the typical penalties associated with early mortgage repayment, thus making this option the most appropriate answer.