There’s a new and costly twist for Canadian homeowners considering refinancing or switching lenders. Two of Canada’s biggest banks and mortgage lenders, TD and RBC, sharply cut their posted fixed mortgage rates. While these cuts might appear borrower-friendly at first glance, they’ve triggered a significant spike in prepayment penalties, specifically, those for fixed mortgages calculated using interest rate differentials (IRD).

The result? Many borrowers are being blindsided by thousands in extra charges for breaking their fixed-rate mortgages early, some amid deals already underway.

TD’s Steep Cuts and Immediate Impact

TD Bank reduced its 1-year posted rate by 1.65% and its 2-year rate by 1.95%—some of the most dramatic single-day cuts in recent years. These posted rates are key reference points for IRD calculations, which lenders use to determine prepayment penalties when borrowers end a fixed-rate mortgage before its maturity.

Here’s the issue: lower posted rates widen the gap between a borrower’s contract rate and the comparable term’s posted rate. This results in significantly higher prepayment charges, especially for those who locked in rates during the peak interest periods of 2022 and 2023.

Some borrowers currently refinancing with TD face penalties up to $10,000 higher than expected simply because their lender hadn’t yet ordered their payout statements before the posted rate change took effect. To make matters worse, mortgage payout statement requests can take up to five or more business days, depending on the lender. During that delay, it’s unlikely, but if posted rates were to drop again, the penalty could increase even further, turning a once-economical refinance into a financial misstep.

For example, if a TD client took a 3-year fixed mortgage at 4.30% in August 2023. Before TD’s recent posted rate cuts, the estimated penalty for breaking their $500,000 mortgage was around $5,400, based on a standard 3-month interest charge.

After TD slashed its 2-year posted rate by 195 bps, the comparison rate used in the IRD formula dropped significantly. The result? That same borrower could now face a prepayment penalty of more than $22,000, an increase of almost $17,000.

RBC Rate Drops Also Raise the Cost of Breaking Early

Royal Bank (RBC) followed suit with significant posted rate cuts across several fixed terms. The 2-year rate saw the most significant drop, falling by 0.85%. The 1-year rate was reduced by 0.55%, while the 3-year and 5-year terms were lowered by 0.35% and 0.30%, respectively.

While such reductions benefit new borrowers, they’ve had the opposite effect on existing mortgage holders. Any borrower with a fixed-rate mortgage at RBC now faces a lower comparison rate in their IRD calculation, which means a more significant payout penalty if they attempt to refinance or switch lenders.

For example, a client took a 3-year fixed-rate RBC mortgage in August 2023 at 4.30%. With the current posted rate drops, if that client wanted to break the mortgage, they could now face a penalty of more than $16,000, compared to almost $7,000 had they requested the mortgage payment statement a few days before the rate cut. That’s a nearly $9,000 increase due to RBC’s posted rate revision.

The Mechanics Behind the IRD Penalty Spike

The IRD penalty is based on the difference between the borrower’s mortgage rate and the lender’s current posted rate for a comparable term. The more significant the difference and the longer the term left, the higher the penalty.

Banks with inflated posted rates—often higher than actual market rates—exacerbate this issue. When posted rates drop suddenly, the comparison rate falls further below borrowers’ discounted contract rates, creating a “penalty gap” that grows wider.

The Remaining Big Banks Likely to Follow TD and RBC’s Lead

With TD and RBC aggressively slashing posted fixed mortgage rates, Canada’s remaining Big Six banks may soon follow. These posted rates serve as reference points in interest rate differential (IRD) calculations, meaning that a drop in posted rates, while appearing consumer-friendly, significantly increases mortgage penalties for borrowers looking to refinance or switch lenders before their mortgage matures.

This dynamic isn’t exclusive to TD and RBC clients. If lenders like Scotiabank, BMO, CIBC, and National Bank cut their posted rates next, the spike in prepayment charges will ripple across the market. This could catch thousands of homeowners off guard, especially those who locked into fixed-rate mortgages between 2021 and 2023.

Why More Lenders Could Join In

• Market Competition: Banks are pressured to stay competitive in an environment where new mortgage volumes have slowed and rate-sensitive borrowers are shopping around.
• Rate Visibility: Posted rates are still used to calculate prepayment penalties, even if they’re far above borrowers’ discounted rates. Reducing them reduces visible rates to attract new clients, but worsens the math for existing ones.
  Historical Pattern: In past cycles, once two major banks adjust posted rates, the remaining lenders follow within days or weeks to maintain pricing alignment.

Potential Impacts on Borrowers

• Penalty Surprises: Borrowers planning to break their fixed-rate mortgage—even for strategic reasons like accessing equity or refinancing to a lower rate—may find their penalty inflated by thousands of dollars, depending on the lender’s timing.
• Delayed Statements Equal Higher Costs: Many lenders require 5+ business days to issue a payout statement, while the penalty and the per diem levy calculations are typically locked in for 30 days. If there are delays in the new mortgage transaction, requiring the request to be made again, the IRD-based penalty could climb substantially.
• Switching Becomes Riskier: Borrowers seeking better rates or service from another lender may be forced to stay put, not by choice, but by cost.

Refinance Fallout

Mortgage professionals are reporting a growing number of deals falling apart mid-process. Clients with previously approved refinances are walking away after discovering their new penalty is no longer affordable. Others are being advised to act quickly—breaking their mortgage before further posted rate reductions increase the cost even more. For some, that has meant temporarily switching to open mortgages or accepting less competitive retention offers from their current lender to avoid escalating penalties.

If you’re considering refinancing or switching mortgage lenders in Canada, timing is everything—especially with posted rate drops triggering unexpected penalty spikes. Here’s how to protect yourself from rising interest rate differential (IRD) charges and make the most of current mortgage options.

Proactive Steps to Minimize Mortgage Penalties

• Request Your Payout Statement Immediately: Don’t wait until your new mortgage is approved. Order your statement as soon as you start exploring a switch. This locks in today’s prepayment penalty before further posted rate cuts occur. However, you must ensure your new transaction is completed and the payout is made to your existing lender before the payout statement expires.
• Understand Your IRD Risk:  Borrowers with fixed mortgages from the 2022–2023 peak are especially vulnerable. The more significant the gap between your contract rate and the lender’s current posted rate, the higher your potential penalty.
• Consider Using a Mortgage Finance Company (MFC): Unlike big banks, mortgage finance companies typically use actual rates, not inflated posted rates, for penalty calculations. This results in a smaller rate gap when calculating IRD penalties, meaning you could save thousands if you need to break your mortgage early.
• Compare Offers Carefully: A slightly lower rate at another lender might not be worth it if you face a penalty that wipes out the savings. Use cost-benefit analysis, not just rate comparisons.
• Consult a Mortgage Expert: Mortgage professionals can help you assess whether it’s worth breaking your mortgage, when, and how to negotiate for better terms. In today’s market, personalized advice can save thousands.

How to Avoid These Outsized Prepayment Penalty Calculations

The sharp reduction in posted rates at TD and RBC is reshaping the prepayment penalty landscape overnight. What once looked like a wise time to refinance can quickly become a financial minefield for borrowers, especially those with fixed-rate mortgages from the past couple of years.

With more than a million Canadians expected to renew or reconsider their mortgage terms in 2025, understanding how posted rates impact IRD calculations has never been more critical.

Looking to sidestep those sky-high penalty charges? One smart move is to arrange your mortgage through a mortgage finance company like nesto. Unlike the big banks that rely on inflated posted rates, MFCs use actual contract rates when calculating prepayment penalties. That means a smaller rate gap—and potentially thousands in savings—if you ever need to break your mortgage early. It’s a strategic way to keep more money in your pocket, not your lender’s.

Navigating this evolving mortgage market requires more than just rate shopping—it calls for expert advice. Contact nesto mortgage experts today for help protecting yourself from rising penalties and making smart, well-timed refinancing decisions.

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