A prepayment privilege is the amount you can pay toward your mortgage above your regular payments without a penalty. It is written into your mortgage contract, and the limits differ from lender to lender. Using it each year can shorten your amortization by years.
The two common forms
Most privileges allow an annual lump sum, usually a percentage of the original mortgage amount, applied to the principal. Some also allow a yearly increase in your regular payment, often by a set percentage of the original payment. Sample products cited by lenders range from about 10% to 20% of the original balance, so read your own agreement for the figure, the timing and any minimum.
What a lump sum does
A lump sum reduces the principal straight away, so the interest on the following months is calculated on a smaller balance. Your regular payment usually stays the same and the mortgage is paid off sooner. Ask your lender whether an extra payment shortens the amortization or lowers future payments. Shortening the amortization saves more interest.
Penalties depend on the balance
If you break a closed mortgage, the penalty is calculated on the balance. Using your privilege first lowers that balance, which is why the breaking-a-mortgage penalty guide recommends it.
Timing matters
- Check the dates. Some lenders do not allow a prepayment in the weeks before a renewal or break date.
- Find out whether the privilege resets each calendar year or on the anniversary of the mortgage.
- Ask whether unused privilege carries forward. In many contracts it does not.
Open and closed mortgages
An open mortgage normally lets you prepay any amount at any time without a penalty, usually at a higher rate. A closed mortgage with a prepayment privilege keeps the rate lower but limits what you can pay early. The open vs closed mortgage guide compares the two.
See the effect
The mortgage payoff calculator shows how a lump sum changes the balance and the payoff date, and the amortization schedule shows the interest saved year by year.
Try the mortgage payoff calculator →
Official source
FCAC · Mortgage fees: prepayment penalties
This guide explains general rules. Confirm your figures with your lender, lawyer, or the official source before you act.