What Are Prepayment Privileges?
Closed mortgages come with restrictions on paying off more than your scheduled payments — but virtually all Canadian mortgages include prepayment privileges that let you pay extra without triggering a penalty.
There are two types:
| Privilege Type | What It Lets You Do |
|---|---|
| Annual lump-sum | Pay a one-time or multiple lump sums up to a % of original principal per year |
| Payment increase | Temporarily or permanently increase your regular payment amount |
These are not the same as open mortgage features. Use them incorrectly and you’ll still owe a penalty on any excess.
Lump-Sum Prepayment: How It Works
The Limit
Your annual lump-sum limit is a percentage of your original mortgage amount — not your current balance. This means your limit stays the same each year regardless of how much you have paid down.
Example:
- Original mortgage: $500,000
- Annual lump-sum privilege: 15%
- Maximum lump sum per year: $75,000
Note: “Original” typically means the amount at the time you signed that term — not an earlier renewal amount.
When Can You Pay?
Most lenders allow lump-sum payments:
- On your payment due date
- As a standalone payment any time during the year (verify with your lender)
The privilege resets on your mortgage anniversary date — unused room does not carry forward.
Big Bank vs. Monoline Prepayment Limits
| Lender | Lump-Sum % | Payment Increase |
|---|---|---|
| TD | 15% annually | Up to 100% (double) |
| RBC | 10% annually | Up to 100% |
| BMO | 20% annually | Up to 100% |
| Scotia | 15% annually | Up to 100% |
| CIBC | 20% annually | Up to 100% |
| First National | 15% annually | Up to 100% |
| MCAP | 20% annually | Up to 100% |
| Street Capital | 20% annually | Up to 20% increase |
Confirm current limits with your lender — policies change.
Payment Doubling Privilege
Most lenders also allow you to double your regular payment during the term. This directs the extra amount entirely to principal.
Example:
- Regular payment: $2,400/month
- Doubled payment: $4,800/month
- Extra principal per month: $2,400
You can often switch between normal and doubled payments as needed. Some lenders require advance notice; others allow it at any payment date.
How Much Interest Do Prepayments Actually Save?
This is where prepayment privileges create enormous value. Extra principal paid early eliminates interest on that amount for every remaining year of the mortgage.
Example: $100,000 Lump Sum on a $500,000 Mortgage
| Scenario | Outstanding Balance | Remaining Amortization | Total Interest Remaining |
|---|---|---|---|
| No prepayment | $500,000 | 20 years @ 5.5% | ~$318,000 |
| $50,000 lump sum at year 5 | $450,000 | ~18.4 years | ~$257,000 |
| $100,000 lump sum at year 5 | $400,000 | ~16.4 years | ~$200,000 |
A $100,000 prepayment at year 5 can save you over $118,000 in interest and cut 3.6 years off your mortgage.
The Compounding Effect: Why Earlier Is Better
Every dollar of principal prepaid in year 1 eliminates interest charges for the entire remaining life of the mortgage. A dollar prepaid in year 19 only eliminates 1 year of interest.
| Year of $10,000 Prepayment | Interest Saved (5.5% rate, 20-year original term) |
|---|---|
| Year 1 | ~$11,600 |
| Year 5 | ~$8,900 |
| Year 10 | ~$5,800 |
| Year 15 | ~$2,900 |
| Year 19 | ~$600 |
Strategies for Using Prepayment Privileges
Strategy 1: Annual Tax Refund Lump Sum
If you receive a Canada Revenue Agency tax refund, routing it to your mortgage is one of the highest guaranteed-return uses of that money. A 5% mortgage rate = 5% guaranteed, after-tax return.
Strategy 2: Payment Ratcheting at Renewal
At each renewal, voluntarily keep (or increase) a higher payment even as rates move. This maintains amortization reduction without restructuring.
Strategy 3: Bi-Weekly Accelerated Payments
Switching from monthly to accelerated bi-weekly effectively makes one extra monthly payment per year, reducing a 25-year amortization by approximately 2–3 years over the life of the mortgage.
| Payment Schedule | Annual Payments Made | Extra Payment/Year |
|---|---|---|
| Monthly | 12 | — |
| Semi-monthly | 24 | — (same as monthly) |
| Bi-weekly (regular) | 26 | Slight extra |
| Bi-weekly (accelerated) | 26 | Equivalent to ~1 extra monthly |
Strategy 4: Use Lump-Sum Privilege Before Breaking
If you’re considering breaking your mortgage, use your remaining annual lump-sum privilege first. This reduces the outstanding balance before the penalty is calculated, directly reducing the penalty amount.
Using Prepayment Privileges Near Sale or Renewal
- Before selling your home: Apply your annual lump-sum before listing to reduce the balance subject to any penalty if buyers cannot assume the mortgage
- Before renewal: Most lenders allow one lump sum just before the maturity date; confirm with your lender
- If porting: Prepayments made apply to the ported mortgage balance, reducing the blended-rate calculation on any increase
How to Make a Prepayment: Practical Steps
- Log in to your lender’s online portal and look for “Make a Lump-Sum Payment” or “Mortgage Prepayment”
- Confirm your remaining prepayment room for the current anniversary year
- Select the payment amount (do not exceed the limit)
- Choose the effective date (usually the next payment date)
- Get a written confirmation — keep it for your records
What Prepayment Privileges Cannot Do
- They do not reduce your regular scheduled payment amount mid-term (that requires a refinance or restructuring)
- Unused room does not carry forward to the next anniversary year
- They apply per term, not cumulatively across multiple terms
Related Reading
- Bridge Loans in Canada: How They Work and When to Use Them (2026)
- Canada Mortgage Stress Test 2026: How It Works and What You Can Afford
- CMHC Mortgage Insurance in Canada: What It Is, What It Costs, and How to Avoid It (2026)
→ Back to: Complete Canadian Mortgage Guide