Mortgage Prepayments: How Small Extra Payments Shave Years Off">
Mortgage Prepayments: How Small Extra Payments Shave Years Off
Meta description: Learn how small mortgage prepayments in Canada cut years and thousands in interest, within your lender's annual prepayment privilege limits.
Prepayment privileges are the single most underused money-saving feature in Canadian mortgages. Almost every fixed-rate mortgage from the Big 5 banks lets you pay extra each year without penalty, usually 15 to 20% of the original balance as a lump sum, plus payment increases and double-up payments. The catch: hardly anyone uses them.
That is a shame, because small extra payments move the needle far more than most people expect. Every extra dollar goes straight to principal, and principal paid early stops charging you interest for the rest of the amortization. This article walks through the actual math with real Canadian numbers.
What your prepayment privileges actually include
Most Big 5 bank mortgages come with three tools, and you can usually use all of them in the same year:
- Lump-sum prepayment: 15 to 20% of your original mortgage balance per calendar year, penalty-free. Some lenders base it on the outstanding balance instead, so check your contract.
- Payment increase: bump your regular payment by 10 to 20% per year. The increase stays for the rest of the term unless you change it.
- Double-up payments: make any regular payment twice, and the extra amount goes entirely to principal. Often unlimited, but capped by the lump-sum limit at some lenders.
Things like anniversary payments or skip-a-payment options vary by lender, but the three above cover the savings. The one thing you cannot do is exceed the annual limit. Go over it, and the lender can charge you a prepayment penalty, which defeats the purpose.
The math: $100 a month on a $450,000 mortgage
Let us say you buy in the Toronto or Vancouver suburbs and land a $450,000 mortgage at 4.50% with a 25-year amortization. Your monthly payment is $2,502. Over 25 years you pay roughly $300,000 in interest. That is the baseline.
Now add $100 to each monthly payment, making it $2,602. Here is what happens:
- Amortization drops from 25 years to about 23 years and 4 months (roughly 20 months shaved off)
- Total interest drops from about $300,000 to about $277,000
- Total savings: roughly $23,000 in interest
One hundred dollars a month is a dinner out for two. In exchange, you own your home nearly two years earlier and keep $23,000. The effect compounds because every extra payment also shrinks the principal that next month's interest is calculated on.
The math: a $20,000 lump sum after year one
Lump sums hit harder because they knock down principal in one shot. Same mortgage: $450,000 at 4.50%, 25 years. After one year of payments your balance sits around $440,000. Then you put a $20,000 bonus, tax refund, or inheritance toward the mortgage. That is well inside a 15% privilege limit ($67,500 on a $450,000 mortgage).
- New balance: about $420,000
- Amortization drops to about 22 years and 1 month (roughly 2.9 years shaved off)
- Total interest drops to about $262,000
- Total savings: roughly $38,000 in interest
A $20,000 lump sum is 4.4% of the mortgage. It wipes out almost 3 years of payments and nearly $38,000 in interest. If you can manage a lump sum once every few years, you can realistically take a 25-year amortization down under 20 years.
Double-up payments and payment increases
If you get paid biweekly, the double-up feature is almost invisible. Doubling your $1,250 biweekly-ish payment once a year sends an extra $2,500 to principal. Do it every year and you trim roughly a year off the amortization.
Payment increases are the quiet powerhouse. Increasing your payment by 10% per year, which most lenders allow, gets dramatic fast because you can compound the increases each year. Even a single 10% increase, from $2,502 to $2,752, knocks about 2 years and 3 months off a 25-year amortization and saves roughly $31,000 in interest. The trick is that you rarely feel a 10% bump if your salary is also growing.
When prepaying is NOT the best use of your money
Prepayments are not always the right call. Run this checklist before sending money:
- High-interest debt first. Carrying a credit card balance at 20% while prepaying a 4.50% mortgage is math going the wrong way. Kill the high-interest debt first.
- Emergency fund. Do not drain your cash cushion to prepay. Once extra money goes into the mortgage, getting it back out means refinancing and fees.
- Investing trade-off. If your RRSP or TFSA contributions would earn a return well above your mortgage rate over time, investing can beat prepaying. This is personal, but do not prepay out of guilt.
- Term timing. If you are two months from renewal and planning to switch lenders, hold the lump sum. You can put it toward the mortgage at the new lender, and it avoids any limit headaches.
Also note that extra payments usually do not lower your required monthly payment. They shorten the amortization. If you want lower payments, that is a conversation to have at renewal.
How to actually do it
Log into your bank's mortgage section or call the mortgage line. Specify that the extra payment is a prepayment to principal, not an advance of future payments, or the money may just sit as a credit against next month's bill. If you are doing lump sums, confirm how much of your annual privilege you have used before you send the money, especially if you plan more than one lump sum in a year.
One more tip: many lenders let you set up an automatic annual lump sum. Automate it for the month your bonus or tax refund arrives, and the savings happen without willpower.
Bottom line
A $100 monthly top-up on a $450,000 mortgage saves roughly $23,000 in interest and nearly two years of payments. A single $20,000 lump sum saves roughly $38,000 and almost three years. Small, consistent prepayments are one of the highest-return moves in Canadian personal finance.
If your mortgage is coming up for renewal, checking what rates other Canadians are actually getting is the other half of the equation. Browse the crowdsourced live rate reports on fiveyear.ca to see where you stand.