Prepayment privileges and penalties, explained
How to pay your mortgage off faster without a penalty, and what it costs to break your mortgage early in Canada.
Key takeaways
- Most closed mortgages let you prepay a set amount each year with no penalty.
- Extra payments go straight to your balance and can save a lot of interest.
- Breaking a mortgage early usually costs a penalty. Fixed rates often cost more to break.
Open vs. closed mortgages
An open mortgage lets you pay off any amount, at any time, without a penalty. The trade-off is a higher rate. A closed mortgage has a lower rate, but limits how much you can prepay each year. Most Canadians choose closed mortgages.
Common prepayment privileges
Closed mortgages usually include some ways to pay extra without a penalty. Common examples:
- Lump-sum payments: often 10% to 20% of the original mortgage amount each year.
- Payment increases: raising your regular payment, often by up to 10% to 20%.
- Double-up payments: paying twice on a regular payment date.
- Accelerated payments: weekly or bi-weekly accelerated schedules add the equivalent of about one extra monthly payment a year.
Every lender sets its own limits, and unused privileges usually don't carry over. Check your mortgage agreement.
Why prepaying helps
Extra payments go straight to your principal, so less of your balance collects interest. Over many years, even small extra payments can take years off your amortization and save thousands in interest.
Prepayment penalties
If you pay more than your privileges allow, or break your mortgage to sell, refinance or switch mid-term, you'll usually pay a penalty:
| Mortgage type | Typical penalty |
|---|---|
| Variable | About three months of interest |
| Fixed | The greater of three months of interest or the interest rate differential (IRD) |
IRD penalties on fixed mortgages can be large, and each lender calculates them differently. Ask your lender for an exact penalty quote before you decide anything.
Ways to avoid a penalty
- Make changes at renewal, when the term ends.
- Use your yearly prepayment privileges.
- If you're moving, ask whether your mortgage is portable (can move to your new home).
This guide is general information, not financial advice. Rules and products change, and every situation is different. A licensed mortgage broker can tell you what applies to you.