Higher Prepayment Penalties Can Be a Detriment to Your Client’s Financial Plans

Recent cuts to posted fixed rates by TD and RBC have triggered a sharp rise in mortgage prepayment penalties, particularly for clients with fixed-rate terms from the 2022–2023 peak. These penalties, calculated using interest rate differentials (IRD), catch homeowners off guard, with some seeing increases of $10,000 or more virtually overnight.

Why? Lower posted rates widen the gap between a borrower’s contract rate and the current posted rate used in penalty formulas. This can turn a planned refinance or lender switch into a costly misstep, especially if payout statements are delayed or not locked in ahead of further rate changes.

This is likely just the beginning. More clients could face similar penalty spikes if other Big Six banks follow TD and RBC’s example.

Strategies to Help Your Clients Minimize IRD Surprises

• Get Ahead of Payout Timelines

Encourage clients to request their mortgage payout statements early, even before the new financing is finalized. This can lock in today’s penalty before further posted rate drops increase costs. Discharge statements are typically locked in for 30 days, so timing the new mortgage completion can be tricky if the payout details are requested well in advance.

• Consider MFCs to Minimize Penalties 

Recommend mortgage finance companies like nesto for clients likely to refinance before maturity. Unlike big banks, MFCs use actual contract rates, not inflated posted rates, when calculating penalties. That means smaller IRD gaps and potentially thousands in savings at discharge.

• Run Cost-Benefit Scenarios Before Breaking 

A lower rate with a new lender might not be worth it if the penalty eats up all the savings. Run penalty simulations and cost-benefit analysis calculations before making a move. Clients often make better decisions with clear numbers in front of them.

Don’t Let Prepayment Penalties Derail Your Clients’ Financial Future

Higher IRD penalties disrupt mortgage plans and can derail carefully laid financial strategies, like debt consolidation, investment reallocation, or early retirement planning. An unexpected $10,000–$20,000 payout charge can force clients to delay or abandon core parts of their financial roadmap, from retirement timelines to RESP contributions or debt consolidation goals.

As a financial advisor, integrating mortgage planning into client conversations has never been more crucial. Helping clients understand the penalty implications of rate movements before they act can protect liquidity, reduce risk, and reinforce your value as a proactive, full-picture planner.

Partner with nesto to deliver seamless, penalty-smart mortgage solutions that keep your clients’ long-term goals intact.

Why Choose nesto

At nesto, our commission-free mortgage experts, certified in multiple provinces, provide exceptional advice and service that exceeds industry standards. Our mortgage experts are non-commissioned, salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and advice quality. nesto aims to transform the mortgage industry by providing honest advice and competitive rates using a 100% fully digital, transparent, seamless process.

nesto is on a mission to offer a positive, empowering and transparent property financing experience – simplified from start to finish.

Contact our licensed and knowledgeable mortgage experts to find your best mortgage rate in Canada.