Prepayment Privilege

A prepayment privilege is the right written into your mortgage contract to pay extra toward your mortgage — above your regular scheduled payment — without being charged a penalty, typically up to a set percentage of the balance or the original principal each year.

How the privilege usually works

The privilege is a contract term, not a legal entitlement, so its size and shape come from the lender and the product you chose. On a typical closed mortgage it appears in a few common forms:

Lump-sum payments — one or more extra payments a year, often capped as a percentage of the original principal or of the current balance.
Increased regular payments — raising the scheduled amount by a set percentage, which shortens the amortization period.
Double-up or round-up options — matching a payment or rounding each one up to the next increment.

Most privileges reset once a year, commonly on the mortgage anniversary date. Unused room usually does not carry forward to the next year, and the allowance often differs between fixed-rate and variable-rate products.

Why the cap matters

The cap protects the lender's expected interest income. If you prepay more than the privilege allows, the extra amount sits outside the contract and the lender can charge a prepayment penalty. On a fixed-rate closed mortgage that charge is often the greater of three months' interest or the interest rate differential. A generous privilege therefore has real value: it lets a borrower cut principal and total interest without paying to exit the contract early.

What to check before you use it

Read the clause in your mortgage commitment rather than relying on a general description. Useful questions include: is the cap based on the original principal or the current balance; when does the privilege year begin; does an increased payment share the same limit as a lump sum; and does the privilege survive a renewal unchanged?

You can model the effect of extra payments with our mortgage prepayment calculator to see how a lump sum or an increased payment changes the payoff date and the total interest paid.

Frequently asked questions

Is a prepayment privilege the same as a prepayment penalty?

No. The privilege is the free allowance written into your contract. A prepayment penalty is the charge a lender applies when you exceed that allowance, or when you break the mortgage before the term ends. On a closed fixed-rate mortgage, that penalty is often the greater of three months' interest or the interest rate differential.

Do all Canadian mortgages have a prepayment privilege?

Most closed Canadian mortgages include some prepayment privilege, but the size and type vary by lender and product. Open mortgages generally let you prepay any amount at any time, usually at a higher interest rate. Check your mortgage commitment or renewal documents, because the privilege can change at renewal.

Does using my prepayment privilege lower my payment or shorten my amortization?

It depends on the lender and on what you instruct. Extra money normally goes straight to principal, which can shorten your amortization period. Some lenders automatically reduce your scheduled payment instead unless you ask them to keep it the same. Confirm the default treatment before sending a lump-sum payment.