How lump-sum prepayments actually work
A lump-sum prepayment is a one-time cash payment applied straight to your mortgage principal, on top of your normal monthly payment. The lender reduces your remaining balance immediately, so every subsequent month's interest calculation runs on a smaller base. Total interest saved compounds across the rest of the amortization. The savings are larger than most buyers expect.
Lender prepayment privileges
Every Canadian mortgage has a prepayment privilege written into the contract. Most A-lenders allow 10% to 20% of the original principal as a lump-sum prepayment per year without penalty. Some allow you to double up regular payments. Some allow both. Read your mortgage contract before assuming. Going over the privilege triggers a prepayment penalty (see our prepayment penalty calculator).
Where the savings come from
Math example. $600K mortgage at 4.5% over 25 years. A one-time $25K lump-sum prepayment in year 3 saves roughly $35K in total interest over the remaining 22 years, and shaves about 18 months off the amortization. The savings ratio (interest saved per dollar prepaid) is highest in the early years when most of each monthly payment is interest. Later prepayments save less per dollar because the loan is already mostly principal.
Lender-by-lender prepayment privilege rules
Three main patterns we see at A-lenders:
- 10/10 privilege. Up to 10% of original principal per year in lump sum, plus up to 10% increase to regular monthly payments. RBC, TD, BMO, and most monolines.
- 15/15 privilege. Up to 15% lump sum plus up to 15% monthly increase. Scotia and a few others.
- 20/20 privilege. The most generous tier; some lenders advertise it as a feature.
Timing strategy
If you're going to do a lump-sum prepayment, earlier in the amortization saves more than later. But timing within a year also matters: prepayments allowed are per calendar year (or per anniversary year, depending on the contract). Doing $10K in December and another $10K in January effectively uses privilege from two different years. Some buyers split a year-end bonus this way to maximize prepayment power.
How to use this calculator
Plug in your remaining mortgage balance, current rate, remaining amortization, and the lump-sum amount. The calculator returns the interest saved and the months shaved off the amortization. Run it at three lump-sum sizes (your annual bonus, double your annual bonus, your max privilege) to see how the savings scale. Book a 20-minute chat with the FRIVE team if you want help mapping prepayment strategy to your specific situation.
Frequently asked questions
How much can I prepay without penalty?
Check your mortgage contract for your specific prepayment privilege. Common Canadian privileges are 10%, 15%, or 20% of the original principal per year, plus an equivalent percentage increase to regular payments. Going above the privilege triggers a penalty.
Does prepaying reduce my monthly payment?
No, not by default. Most lenders apply the prepayment to principal, which shortens the amortization but keeps the monthly payment the same. To lower the monthly payment, you usually need to refinance.
When in the term should I prepay?
Early matters more than late. A lump sum in year 3 saves more than the same lump sum in year 15, because the early prepayment removes principal that would otherwise have been charging interest for 22 more years.
Is prepayment better than investing the cash?
Depends on the rate. Prepaying saves at your mortgage rate (let's say 4.5%). Investing the cash earns whatever your portfolio returns (5-7% for a balanced portfolio, more or less). If your portfolio return is higher than your mortgage rate, investing wins on expected value. If they're close, prepayment is the guaranteed-saved option.
Can I prepay in the first year of a mortgage?
Yes. Prepayment privileges typically apply from day one. Some lenders have small restrictions in the first 12 months (e.g., prepayment allowed only after month 6). Check your contract.
Does the unused prepayment privilege carry over?
Usually no. If you don't use your 10% privilege in year 1, you can't add it to year 2's allowance. Use it or lose it. A few lenders allow carry-forward; most don't.
What if I prepay more than the privilege?
You'll pay a penalty on the excess. The penalty is usually the higher of three months' interest or the Interest Rate Differential (IRD). On a fixed mortgage, the IRD can be substantial. Our prepayment penalty calculator models the math.
Does prepayment affect refinancing later?
Prepayments reduce your balance, which can affect the loan-to- value at future refinance. Lower LTV often means better rates and access to a wider lender market. Prepayment is a way to build refinance flexibility.
Can I prepay to escape CMHC insurance?
No. The CMHC premium was paid at closing and is already on the loan. Prepaying reduces your balance but doesn't refund the premium. CMHC is a sunk cost once paid.
Should I prepay or build an emergency fund?
Emergency fund first. We tell first-time buyers to have 3-6 months of all-in housing costs in liquid savings before diverting cash to prepayment. The mortgage will be there; the emergency might be tomorrow.
Sources
- Financial Consumer Agency of Canada — Mortgage prepayment. canada.ca/fcac/prepay-mortgage
- OSFI Guideline B-20 — Residential Mortgage Underwriting. osfi-bsif.gc.ca
