Prepayment Privilege

A prepayment privilege is a contractual right that allows you to pay down additional principal on a closed mortgage without triggering a prepayment penalty. Most Canadian lenders offer 10–20% annual prepayment privileges — meaning you can pay an extra 10–20% of the original mortgage balance each year as a lump sum. For example, on a $500,000 mortgage with a 15% privilege, you can pay up to $75,000 extra per year penalty-free. The exact terms are in your mortgage agreement — look for "prepayment options" or "lump sum payment" language. The FCAC mortgage guide explains how prepayment terms are disclosed at signing.

Many closed mortgages include both a lump sum prepayment privilege (extra principal payments) and a payment increase privilege (increasing your regular scheduled payment). A common structure is 20/20: pay up to 20% extra as lump sums per year AND increase your regular payment by up to 20% once per year. Increasing your regular payment accelerates amortization permanently — a $200/month payment increase on a $400,000 mortgage at 5.5% can save approximately $40,000 in interest and shorten the amortization by 3+ years. Check your lender's prepayment privileges on the FCAC mortgage comparison tools.

Paying more than your prepayment privilege allows triggers a prepayment penalty on the excess amount. For fixed-rate mortgages in Canada, the penalty is typically the greater of 3 months' interest or the Interest Rate Differential (IRD) — often several thousand dollars. For variable-rate mortgages, the penalty is typically 3 months' interest only. Always confirm your remaining privilege room with your lender before making a large lump sum payment.

No — prepayment privileges typically do not carry forward. If you do not use your 15% privilege in year one, you cannot pay 30% in year two. Each year's privilege resets on your mortgage anniversary date. Some lenders allow privilege usage at any time during the year (cumulative up to the limit), while others only allow it on specific dates — check your mortgage contract or call your lender's prepayment line. The OSFI residential mortgage guidance sets the underwriting framework under which these terms operate.

The impact depends on timing — earlier prepayments save more because interest is front-loaded. On a $500,000 mortgage at 5.5% over 25 years, a $10,000 lump sum made at the start of year 1 saves approximately $22,000 in total interest over the life of the mortgage. The same $10,000 paid in year 10 saves approximately $12,000. Use the extra payment impact calculator to model your specific scenario with exact timing and amounts.

Open mortgages allow you to pay any amount at any time without penalty — you do not need a specific "privilege" because the entire mortgage can be prepaid. However, open mortgages carry a higher interest rate (typically 0.75–1.5% above comparable closed rates) to compensate the lender for this flexibility. Open mortgages are typically used for short-term bridging situations where the borrower expects to sell or refinance soon. For most borrowers, a closed mortgage with a 20/20 prepayment privilege at a lower rate is more cost-effective. Compare current open vs closed rates at RateHub.