Understanding prepayment penalties isn’t nearly making ready purchasers for a possible charge, it’s more and more a strategic edge for mortgage brokers.
That was the message from Matt Imhoff, founding father of Prepayment Penalty Mentor, throughout a current MPC-hosted webinar.
Imhoff, a dealer himself, has constructed his status serving to different brokers decode rate of interest differentials (IRDs) and use penalty insights to uncover early change alternatives, ship smarter recommendation and construct long-term consumer belief.
Getting clear on the numbers
A lot of the confusion round penalties comes right down to how IRDs are calculated. As Imhoff defined, the penalty on a hard and fast mortgage is often the larger of three months’ curiosity or the IRD, which displays the quantity the lender says it’s shedding in curiosity if the borrower ends their time period early.
That “curiosity they’re shedding” is predicated on a comparability fee the lender units. Some use actual market charges, whereas others use artificially low reinvestment charges that drive up the penalty.
“The decrease the lender says they’ll earn, the larger the IRD,” Imhoff mentioned. “A few of these comparability charges don’t mirror precise charges you could find available in the market. That’s the place the price can actually balloon.”
Why timing issues
A key a part of the session centered on how prepayment penalties evolve over time. As a mortgage progresses, lenders don’t persist with a single comparability fee. As a substitute, they modify it based mostly on how a lot time period is remaining, beginning with the 5-year fee, then shifting to the 4-year, 3-year, and so forth.
These shifts, often called “transition factors,” could cause penalties to leap or drop unexpectedly, relying on the place rates of interest are on the time.
Imhoff confirmed examples of how ready just some weeks, or appearing a month sooner, can dramatically change the penalty quantity. For instance, one case examine confirmed a penalty leaping by $5,000 as a result of the lender began utilizing its 2-year comparability fee.
Brokers who can anticipate these shifts can higher information purchasers on when to maneuver and when to carry, he mentioned.
Actual examples from the sector
The webinar included a number of real-world situations based mostly on dealer experiences:
- One consumer had three years left on a 5-year mounted at 5.24%. The penalty was simply three months’ curiosity, however was about to spike because the contract approached a brand new comparability window. The dealer moved rapidly and saved the consumer 1000’s.
- One other file concerned a monoline lender the place the penalty was $8,250. However ready 30 days would drop it to simply beneath $6,800, purely resulting from a transition to a one-year fee.
- CIBC mortgages from early 2023 have been highlighted as a present alternative. Most nonetheless default to a few months’ curiosity, even with greater than two years remaining. However that window might shut quick as soon as they change to evaluating towards two-year posted charges.
- CIBC mortgages from early 2023 have been highlighted as a present alternative, offered that they’ve greater than two years and 6 months remaining. Most nonetheless default to a few months’ curiosity (on the preliminary posted fee), even when the precise rate of interest is excessive (5% or above). However that window might shut quick as soon as they change to evaluating towards two-year posted charges, or when CIBC lowers its higher-than-market 6.64% 3-year posted fee.
A brand new software for a long-time downside
Whereas all of this would possibly sound difficult, there’s now a software that takes the guesswork out of it. Imhoff walked brokers by the platform he co-founded, Prepayment Penalty Mentor, which fashions penalties throughout greater than 50 lenders and helps determine timing home windows and financial savings alternatives earlier than the renewal dialog even begins.
Prepayment Penalty Mentor affords tiered pricing beginning at $20/month, with increased tiers together with superior instruments for refinance comparisons and full analytics. For Mortgage Professionals Canada members, this introductory value drops to as little as $10/month (as much as 50% off), accessible through the use of their MPC login e mail.
CMT took a more in-depth take a look at the software in March: The prepayment penalty lure: New software helps brokers forecast the actual value of breaking a mortgage
What all of it comes right down to
The extra brokers perceive how prepayment penalties work and the way they modify over time, the higher positioned they’re to ship recommendation that saves purchasers cash and strengthens relationships.
“It’s not simply concerning the financial savings,” Imhoff mentioned. “It’s about managing expectations, constructing belief, and ensuring your purchasers don’t get blindsided by one thing you can’ve helped them see coming.”
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Final modified: July 30, 2025