What Is a Mortgage Prepayment Privilege?

Buried in your mortgage contract is one of the most powerful tools for paying off your home sooner: the prepayment privilege. It lets you put extra money against your mortgage — without triggering a penalty — so more of every dollar attacks the principal instead of interest. Here's how it works and how to use it wisely.

Key takeaways

• A prepayment privilege lets you pay extra toward your principal each year, penalty-free, within set limits.
• The two main forms are annual lump-sum payments and increasing your regular payment amount.
• Extra payments hit principal directly, so they cut both your balance and the interest you'll ever pay.
• Closed mortgages limit prepayments; open mortgages allow unlimited prepayment but usually cost more.
• Prepaying within your privilege avoids the penalties that apply when you break a mortgage.

What a prepayment privilege is

When you take out a closed mortgage, you agree to a set payment schedule. A prepayment privilege is the lender's permission to pay more than that schedule requires — up to a yearly cap — without the penalties that normally apply for paying down a closed mortgage early.

It matters because every extra dollar of prepayment goes straight to principal. That reduces the balance interest is calculated on, which compounds in your favour over the life of the loan. To see how principal and interest split over time, read how mortgage amortization works.

The two ways to prepay

Most closed mortgages bundle two privileges. The exact percentages vary by lender, so always check your own contract — but the structure is consistent across the market.

• Annual lump-sum prepayment — pay a percentage of your original principal as a one-time (or occasional) lump sum each year.
• Payment increase — raise your regular payment by a set percentage, permanently or for a stretch.
• Doubling up — some lenders let you double or add to individual scheduled payments.

Limits reset each year

Prepayment caps typically apply per calendar or mortgage year and don't roll over. Plan a bonus, tax refund or windfall around your privilege window so none of it goes to waste.

Why even small prepayments matter

Because prepayments attack principal directly, modest, consistent extra payments can shorten your amortization meaningfully. The earlier in the term you prepay, the bigger the effect — early-amortization payments are heavily weighted toward interest, so reducing principal then saves the most.

Stack your strategies

Combine a yearly lump sum with a small permanent payment increase. Together they chip away at principal from two directions. Model the impact with the amortization calculator.

For a full playbook, see how to pay off your mortgage faster.

Open, closed, and avoiding penalties

Your prepayment freedom depends on your mortgage type. A closed mortgage usually has a lower rate but caps prepayments; exceed the cap or break the mortgage and you face a penalty. An open mortgage allows unlimited prepayment but typically charges a higher rate for that flexibility.

Stay inside the limit

Paying beyond your privilege, or breaking the mortgage entirely, can trigger a prepayment penalty that costs thousands. Understand the trade-offs in open vs closed mortgage and mortgage penalties explained.

Make your privilege work harder

Prepayment privileges help you turn extra cash into a smaller mortgage. The most effective extra cash of all? Money you didn't have to spend on commission in the first place.

Turn cashback into prepayments

Eligible HOMEH buyers receive the industry's highest Cashback Rebate — funds you could apply as a lump-sum prepayment to shrink your mortgage from day one. Sellers list for 1%, or free when they also buy with HOMEH within 6 months, or $395 + HST with a Mere Posting. See your numbers with the mortgage calculator or start at get a mortgage.

New to mortgages? Start with the pillar guide, how mortgages work in Canada.