Question 1

What is a mortgage prepayment in Canada?

Accepted Answer

A mortgage prepayment is any payment made toward your principal above and beyond your scheduled payment. It reduces your outstanding balance faster, which means less interest accumulates over time. In Canada, prepayments typically come in three forms: regular extra monthly payments, annual lump sum payments made once per year on the mortgage anniversary, and one-time lump sum payments from windfalls like bonuses or inheritances.

Question 2

What is the prepayment privilege on a Canadian mortgage?

Accepted Answer

Most Canadian closed mortgages include a prepayment privilege — the right to pay down additional principal each year without triggering a prepayment penalty. A typical privilege allows 10–20% of the original principal as an annual lump sum, plus the ability to increase your regular payment by 10–20%. The exact terms vary by lender and are spelled out in your mortgage agreement. Open mortgages can be prepaid in any amount at any time with no penalty.

Question 3

Does making extra mortgage payments reduce my amortization or my monthly payment?

Accepted Answer

In Canada, extra payments on a closed mortgage typically reduce your amortization — how long you have left to pay — rather than your scheduled monthly payment amount. Your regular payment stays the same, but your mortgage pays off sooner and you pay significantly less total interest. Some lenders will reduce your payment at renewal if you have built up substantial prepayment credit.

Question 4

How much can I save by paying an extra $500 per month on my mortgage?

Accepted Answer

On a $500,000 mortgage at 4.99% fixed over 25 years, paying an extra $500/month saves approximately $120,000–$140,000 in total interest and cuts roughly 7 years off your amortization. The exact amount depends on your rate and remaining term. Use the calculator above with your specific numbers for a precise result.

Question 5

Is it better to make extra monthly payments or an annual lump sum?

Accepted Answer

If the total annual dollar amounts are equal, extra monthly payments save slightly more than an annual lump sum — because the money reduces your balance immediately rather than accumulating over the year before it is applied. However, an annual lump sum can be easier to manage if you receive irregular income such as year-end bonuses or tax refunds. Many Canadians combine both strategies for maximum effect.

Question 6

What happens if I prepay more than my prepayment privilege allows?

Accepted Answer

Exceeding your prepayment privilege on a closed mortgage typically triggers a prepayment penalty. This is usually calculated as three months of interest or an Interest Rate Differential (IRD) — whichever is greater. IRD penalties can be very large if rates have dropped since you signed your mortgage. Always check your mortgage agreement or call your lender before making a large lump sum payment to confirm you are within your privilege limits.

Mortgage Prepayment Calculator Canada

Common prepayment questions