When choosing a mortgage, most borrowers focus on the interest rate and monthly payments. While these are important, neglecting to consider prepayment privileges can be a costly mistake. These privileges allow you to pay off your mortgage faster without penalties, saving you thousands of dollars in interest and giving you more financial flexibility.

What Are Prepayment Privileges?

Prepayment privileges are terms in your mortgage contract that let you pay down your loan faster than the scheduled payments. Depending on your lender and mortgage type, these privileges might include:

• Lump Sum Payments: You can pay a portion of your principal (e.g., up to 15-20% annually) without incurring penalties.
• Increased Monthly Payments: Some lenders allow you to increase your regular payments by a specific percentage.
• Double-Up Payments: With this option, you can double your regular payment amount as often as allowed by your lender.

These options can significantly reduce your mortgage balance and the total interest you’ll pay over the term.

Why Do Prepayment Privileges Matter?

The longer it takes to pay off your mortgage, the more interest accrues. By using prepayment privileges strategically, you can:

1. Reduce your overall debt faster.
2. Save thousands—or even tens of thousands—on interest payments.
3. Build equity in your home sooner.

The Financial Impact of Prepayment

Consider this example: You have a $300,000 mortgage with a 25-year amortization and a 5% interest rate. By making an annual lump sum payment of $10,000, you could pay off your mortgage 7 years early and save over $60,000 in interest.

Common Mistakes Borrowers Make

1. Not Knowing Your Prepayment Limits: Every lender has different rules. Some allow up to 20% in lump sum payments annually, while others may offer less. Exceeding your limit could result in penalties.
2. Not Taking Advantage of Prepayment Opportunities: Many borrowers miss opportunities to make lump sum payments or increase regular payments because they’re unaware of the benefits or think it’s too complicated.
3. Assuming All Mortgages Have the Same Rules: Prepayment terms vary widely between lenders and mortgage products. Failing to ask about these terms when choosing a mortgage could lock you into a less flexible option.

How to Use Prepayment Privileges Wisely

1. Make a Plan: Evaluate your finances and set a realistic prepayment goal. Even small additional payments can make a big difference over time.
2. Start Early: The sooner you start making extra payments, the more you’ll save in interest.
3. Use Bonuses or Tax Refunds: Apply unexpected income, like a work bonus or tax refund, toward your mortgage as a lump sum.
4. Increase Regular Payments: Even increasing your payment by a small percentage can significantly reduce your principal over the term of your mortgage.

Questions to Ask Your Lender or Mortgage Agent

When choosing a mortgage, ask:

• What is the annual prepayment limit?
• Can I increase my regular payments without penalties?
• Are there restrictions on how and when I can make lump sum payments?

Understanding these terms ensures you choose a mortgage that fits your financial goals and provides flexibility for the future.

Why This Matters

Ignoring prepayment privileges means you could be paying more interest than necessary over the life of your mortgage. By leveraging these options, you can gain financial freedom sooner and save significantly in the process.

Resources to Learn More

For more detailed information on prepayment privileges and their benefits, visit this guide by the Financial Consumer Agency of Canada: Mortgage Prepayment Options.

Read the full list of the top 10 mistakes to avoid when getting a mortgage here: Top 10 Mortgage Mistakes

Have Questions? Let’s Talk.

Understanding and utilizing prepayment privileges can be a game-changer for your financial future. If you’d like to learn how to use these options effectively, I’m here to help. Call me at 613-318-6315 or schedule a call with me at your convenience: Book a Call.

Let’s work together to secure the best possible mortgage terms for your needs.

-Phil