Prepayment Privileges Explained: Save on Interest in Your Ontario Mortgage
Most people focus on getting the lowest mortgage rate. But there’s another, often overlooked, way to save thousands of dollars over the life of your mortgage—and that’s by using your prepayment privileges.
Whether you’re buying your first home in Mississauga or renewing your mortgage in Vaughan, understanding how prepayments work in Ontario can give you a real financial edge.
What Are Prepayment Privileges?
Prepayment privileges are features built into many mortgage products that allow you to pay off your mortgage faster without penalties.
There are usually two types:
-
Lump-Sum Payments
You can put down extra money—often up to 10%, 15%, or 20% of your original mortgage amount—once a year.
-
Payment Increases
You can increase your regular monthly payments by a certain percentage, typically up to 15%–20% more than your original payment.
Both reduce your principal faster, which means you pay less interest over the life of the mortgage.
How Prepayments Save You Money
Let’s say you have a $500,000 mortgage over 25 years with a 5% interest rate. If you add just $200 a month in prepayments, you could pay off your mortgage nearly 3 years sooner and save over $30,000 in interest.
Now imagine putting in a lump sum once a year—$5,000 from your bonus or tax refund. That can cut years off your mortgage and dramatically reduce your interest costs.
The longer you wait to start, the less impact it has. So the earlier you take advantage of prepayments, the more you save.
Not All Mortgages Are Created Equal
Different lenders offer different prepayment privileges. Some are flexible. Others are restrictive.
Common limits include:
- A max percentage for lump-sum payments (e.g., 15% of original principal)
- A cap on how much you can increase regular payments annually
- Limitations on when during the year you can make extra payments
And if you go beyond your allowed amount? You may get hit with prepayment penalties, which can be steep.
That’s why reading the fine print matters. Some of the lowest-rate mortgages offer little to no prepayment flexibility—and that could cost you more over time, even if the rate looks good.
When Should You Use Prepayment Privileges?
Prepayments are most effective when:
- You receive unexpected income like a bonus, inheritance, or tax refund
- Your expenses drop and you can afford to increase your payments
- You want to reduce your amortization without refinancing
They’re not mandatory. But for those looking to pay off their mortgage faster and reduce total interest, they’re one of the most effective tools available.
Questions to Ask About Prepayment
Before signing a mortgage, ask your lender or broker:
- What is the annual lump-sum payment limit?
- Can I increase my monthly payments? By how much?
- Are there restrictions on when or how often I can prepay?
- What are the penalties if I exceed the limit or break the mortgage?
These answers could shape whether a mortgage is truly right for your financial goals—not just whether it offers the lowest rate.
If you’re shopping for a mortgage or coming up for renewal, understanding how prepayment privileges work—and choosing a lender that offers flexibility—can make a significant difference over time.
Take the time to explore this with your broker or advisor. It’s not about paying more today. It’s about having more options tomorrow.