Most Canadians don’t realize that their mortgage contract includes built-in privileges to pay down their principal faster — without penalty. Using these strategically can save $30,000–$80,000 in interest on a typical Ontario mortgage and shave 3–7 years off your amortization. Here’s how they work.
The Two Main Prepayment Privileges
| Privilege Type | Typical Allowance | How It Works |
|---|---|---|
| Lump-Sum Payment | 10–20% of original principal per year | One-time payment applied directly to principal; reduces balance and future interest |
| Increased Regular Payments | 10–100% above scheduled payment | Doubles up or increases regular payments; extra goes to principal reduction |
The Impact of a Single Annual Lump Sum
On a $550,000 mortgage at 4.09%, 25-year amortization:
| Annual Lump Sum | Years Saved | Total Interest Saved |
|---|---|---|
| $5,000/year | ~2.5 years | ~$22,000 |
| $10,000/year | ~4.5 years | ~$39,000 |
| $20,000/year | ~8 years | ~$64,000 |
What Happens If You Exceed Your Prepayment Limit?
Exceeding your annual prepayment allowance triggers a penalty — typically 3 months’ interest or the IRD on the excess amount. Always confirm your exact limit with your lender before making a lump-sum payment, especially approaching your term anniversary date when the clock resets.
Open vs. Closed Mortgages
Open mortgages allow unlimited prepayment at any time — but carry rates 1.0%–1.5% higher than closed products. Closed mortgages are the standard choice; their prepayment privileges (10–20% annually) are more than sufficient for most borrowers. Open mortgages only make sense if you’re certain you’ll sell or refinance within 12 months.
Find mortgages with the best prepayment terms at mrates.ca — compare lender-by-lender.