Mortgage prepayment privileges: how much you can pay without a penalty
Short answer: a prepayment privilege is the extra money your mortgage contract lets you pay on top of your regular payments without a penalty. It usually comes in two parts: a yearly lump sum capped at a percentage of the original mortgage amount, and the right to raise your regular payment by a set percentage. Most lenders cap it per year and unused room does not roll over. On a $450,000 balance at 4.5% with 25 years left, one $10,000 lump sum saves about $19,800 of interest and 11 months.
Prepayment privilege calculator
How much can you prepay, and what does it save?
| Option | Paid off in | Total interest | Saved |
|---|
Monthly payments, Canadian semi-annual compounding, rate held constant for the whole amortization, lump sum paid today. Your contract's privilege percentages and dates decide what is allowed. Estimates, not advice.
What a prepayment privilege covers
The Financial Consumer Agency of Canada (FCAC) defines it plainly: the amount you can put toward your mortgage on top of your regular payments without paying a prepayment penalty. It normally lets you do one or both of these:
- Increase your regular payments by a certain percentage.
- Make lump-sum payments up to a certain amount or percentage of the original mortgage amount.
The percentages vary from lender to lender and product to product, so the only number that matters is the one in your contract. A contract might say, for example, that once each year you can prepay up to 10% of the original principal and raise your payment by up to 10%. Note the base: the lump sum is usually measured against the original mortgage amount, not today's balance. On a $500,000 mortgage, 10% is $50,000 a year even after the balance has dropped to $450,000.
If you have an open mortgage, you can prepay any amount without a penalty. Most Canadians have closed mortgages, which is where privileges come in.
| Privilege type | How it works | Best for |
|---|---|---|
| Lump sum | A one-time payment straight to principal, up to your yearly cap, on dates your contract allows | Bonuses, tax refunds, an inheritance, a sale of something big |
| Payment increase | Your regular payment goes up by a set percentage and stays there | A raise, or a debt you just finished paying off |
| Accelerated frequency | Weekly or biweekly accelerated payments, the equivalent of one extra monthly payment a year | People paid every two weeks who want it automatic |
Where to find your prepayment privilege
If your lender is federally regulated, such as a bank, the FCAC says your prepayment privileges and prepayment penalties must appear in an information box at the beginning of your mortgage agreement. Look there first. If you cannot find the paperwork, your renewal statement and your lender's online banking usually show it too, or call and ask for four things:
- The lump-sum limit and whether it is a percentage of the original amount.
- The payment-increase limit.
- The dates you can use them: any time, once a year, or only on payment dates or the anniversary.
- Whether there is a minimum lump sum.
Worked example: what $10,000 does
Take a mortgage that started at $500,000 and now has a $450,000 balance at 4.5% with 25 years left. The regular monthly payment is about $2,491, and if nothing changes, total interest from here is about $297,200.
| Move | Time saved | Interest saved |
|---|---|---|
| $10,000 lump sum today | 11 months | $19,800 |
| $25,000 lump sum today | 28 months | $47,200 |
| $50,000 lump sum today (the full 10% of $500,000) | 55 months | $87,300 |
| Raise payment 10% (+$249 a month) | 45 months | $51,100 |
| Raise payment 20% (+$498 a month) | 78 months | $86,600 |
Why so large? Every dollar of prepayment goes to principal, and that principal would otherwise have been charging 4.5% for up to 25 more years. The $10,000 lump sum is not "worth" $19,800 today; it is $19,800 less interest spread over the life of the loan, assuming the rate stays at 4.5%. Rates will change at each renewal, so treat these as directional, not exact.
Five rules people trip on
- Use it or lose it. The FCAC notes that most lenders limit prepayments per year and that you typically cannot carry unused room into the next year.
- Going over costs you. Pay more than the privilege allows and the extra can trigger a prepayment penalty, usually the higher of three months' interest or the interest rate differential. See how that is calculated in our mortgage penalty guide.
- Payment increases are sticky. The FCAC says that once you increase your payments, you normally cannot lower them until the end of the term. Only raise by what you could keep paying in a bad month.
- Prepay before you break. If you plan to break your mortgage, the FCAC suggests making a lump-sum prepayment first, since any penalty is then based on a lower balance. It also warns that some lenders restrict prepayments close to the date you break the contract, so ask early.
- Renewal is a free window. At the end of the term you can prepay without a penalty. If you have a large amount, the FCAC suggests waiting for maturity rather than paying a big penalty mid-term. Our 120-day renewal plan shows the timing.
Options people compare
There is no single right use of spare cash. These are the options people usually weigh, with the trade-off for each. Looni does not recommend one over another.
| Option | What you get | What you give up |
|---|---|---|
| Lump-sum prepayment | A certain, after-tax return equal to your mortgage rate, and less interest at every future renewal | Liquidity: the money is in the house and hard to get back without borrowing |
| Payment increase | Automatic, steady progress | Flexibility, because it usually cannot be lowered until the term ends |
| Accelerated biweekly | About one extra monthly payment a year, matched to payday. See the biweekly vs monthly breakdown | Very little, if your pay is biweekly |
| Keep it in savings or registered accounts | Cash on hand for emergencies, and other goals | The guaranteed interest saving. Investment choices are a question for a licensed advisor |
Run your own mix in the calculator above, or open every Looni calculator on the tools page.
Questions people ask
What is a prepayment privilege on a mortgage in Canada?
It is the amount your mortgage contract lets you pay on top of your regular payments without a prepayment penalty. It usually allows a yearly lump sum up to a set amount or percentage of the original mortgage, and an increase to your regular payment by a set percentage. The limits vary by lender.
How much can I prepay on my mortgage without a penalty?
Whatever your contract allows. Many closed mortgages express the lump-sum limit as a percentage of the original mortgage amount per year, so 10% of a $500,000 mortgage would be $50,000 a year. Check the information box at the start of your mortgage agreement or ask your lender.
Do unused prepayment privileges carry over to next year?
Typically no. The Financial Consumer Agency of Canada says most lenders limit prepayments per year and you usually cannot add unused room from earlier years to the current year.
How much interest does a $10,000 mortgage prepayment save?
On a $450,000 balance at 4.5% with 25 years left, a $10,000 lump sum saves about $19,800 of interest and about 11 months of payments, assuming the rate stays the same. The earlier in the amortization you prepay, the bigger the saving.
Can I lower my payment after I use a payment-increase privilege?
Usually not until the end of the term. The FCAC notes that once you increase your payments, you normally cannot lower them until the term ends, so only increase by an amount you can keep paying.
What happens if I prepay more than my privilege allows?
The amount above the privilege can trigger a prepayment penalty. For many fixed-rate mortgages that is the higher of three months' interest or the interest rate differential. An open mortgage has no penalty for prepaying.
Should I make a lump-sum payment before breaking my mortgage?
The FCAC suggests using your prepayment privilege first, because any penalty is then calculated on a lower balance. Some lenders restrict prepayments close to the break date, so ask your lender about timing.
The dashboard reads your mortgage line, shows how much prepayment room is left this year and what it would save, and counts down to the renewal date when everything resets.
Sources
Financial Consumer Agency of Canada, Mortgage fees: Prepayment penalties (definition of prepayment privileges, yearly limits and no carry-over, prepaying before breaking, information box requirement, open mortgages) and Paying off your mortgage faster (lump sums, payment increases that normally cannot be lowered until the term ends, accelerated payments). FCAC Mortgage Calculator. Interest math uses Canadian semi-annual compounding for fixed-rate mortgages.