Mortgage Guide

Mortgage Prepayment Privileges: The Fine Print That's Worth Real Money

Almost every closed Canadian mortgage lets you prepay something every year without penalty. Most people never use it — and never realize it can shrink a breakage penalty, too.

Last updated: 2026-07-29

What prepayment privileges are

A closed mortgage restricts how fast you can pay it off — that's what makes it "closed," and why its rate is lower than an open mortgage's. Prepayment privileges are the carve-outs: the amounts you're allowed to prepay each year with no penalty. They come in two flavours, usually quoted as a pair like "15/15" or "20/20":

Lump-sum privilege: pay down a percentage of the original principal each year — commonly 10%, 15%, or 20% depending on the lender. Big banks typically allow 10–15%; many monoline lenders allow 20%.
Payment-increase privilege: raise your regular payment by the same sort of percentage. Some lenders also offer "double-up" payments on any payment date.

Details that matter and vary by lender: whether the percentage is of the original or remaining balance, whether unused room carries forward to next year (usually it doesn't), whether the lump sum can be made any time or only on payment dates or the anniversary, and minimum amounts. The answers are in your mortgage document's prepayment section — worth actually reading before you have $20,000 in hand.

What a prepayment is actually worth

Every prepaid dollar goes straight to principal, and the interest it would have accrued — at your mortgage rate, with Canadian semi-annual compounding — is saved for the rest of the amortization. Two effects follow:

The interest saving compounds quietly for decades. A single $10,000 lump sum at 5% early in a 25-year amortization avoids roughly $10,000–$13,000 of interest over the remaining life of the loan — the earlier in the amortization, the bigger the effect, because early-years payments are mostly interest.

The amortization shortens. Your required payment doesn't change after a lump sum; instead, the loan simply ends sooner. Prepaying is one of the few guaranteed, tax-free returns available to a Canadian household: it "earns" your mortgage rate, risk-free.

Guaranteed isn't the same as optimal. If your mortgage is at 4% and you have unused RRSP room in a high tax bracket, or an employer match you're not capturing, those often beat prepayment. Prepaying wins most clearly against high rates, in conservative portfolios, and for people who value being debt-free as a goal in itself.

The trick most people miss: prepay right before breaking

Mortgage penalties — whether three months' interest or the Interest Rate Differential — are calculated on your outstanding balance. If you're about to break the mortgage anyway (selling, refinancing) and you have unused prepayment privilege this year, using it immediately before the break shrinks the balance the penalty is computed on.

On a $400,000 balance with a 20% privilege and an IRD penalty of, say, 3% of balance, prepaying $80,000 first cuts the penalty by roughly $2,400 — for money you were about to hand over at closing anyway. Some lenders disallow prepayments made within days of a discharge or once a payout statement is issued, so check the rules and the timing with your lender first, but where it's allowed, it's free money.

Estimate your penalty both ways with the Mortgage Penalty Calculator, and read the breakage decision guide before deciding a break is worth it at all.

Smart times to use the privilege

At renewal time — with no limit at all. On the renewal date itself, between terms, you can usually pay down any amount penalty-free. If you're expecting a windfall near renewal, waiting a few weeks can beat squeezing under this year's percentage cap. Model your renewal scenarios with the Mortgage Renewal Calculator.
When renewing into a higher rate: a lump sum at renewal directly shrinks the balance that will now accrue interest at the new, higher rate — the saving per dollar is larger than it was at your old rate.
Annual bonuses and tax refunds: the classic use. Even modest annual lump sums — $2,000–$5,000 a year — remove years from a typical amortization.
Payment increases you won't feel: matching your payment increase to a raise converts income you haven't gotten used to into principal, automatically, every period.

Frequently asked questions

Do unused privileges carry forward?

At most lenders, no — each calendar (or anniversary) year's allowance expires unused. A few lenders allow limited carry-forward. This is a one-line answer in your mortgage document that's worth confirming, because it changes whether "wait and do one big prepayment" is even possible.

Is there any reason not to prepay?

Liquidity. Money in the mortgage is hard to get back — you'd be borrowing (HELOC, refinance) to retrieve it. Don't prepay your emergency fund into the house. Beyond that, it's an opportunity-cost comparison against your other uses for the money, not a trap.

Does prepaying reduce my next monthly payment?

Not by default — the payment stays the same and the amortization shortens. Some lenders will recalculate (lower) the payment on request; keeping the old payment is what generates the interest savings.

Open vs closed: should I just get an open mortgage for flexibility?

Open mortgages carry meaningfully higher rates for unlimited prepayment freedom. Unless you expect to pay the whole thing off within months (imminent sale, inheritance in hand), a closed mortgage with generous privileges is almost always cheaper in practice.

Official sources

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