Prepayment Privilege

The escape hatches in a closed mortgage

A closed mortgage commits you to a payment schedule for the whole term, and overpaying beyond what the contract allows triggers a prepayment penalty. The privilege is the contractual carve-out: a defined amount of extra repayment each year that costs nothing.

Most Canadian closed mortgages include two levers (as of July 2026). First, lump-sum payments of typically 10% to 20% of the original principal per calendar year, applied straight to the balance. Second, a payment increase of often 10% to 20% of your regular payment, and at some lenders a double-up option that lets you match any payment with a second one. Every extra dollar goes entirely to principal, which shortens your effective amortization without touching the contract.

The fine print that varies by lender

The percentages get the attention, but the surrounding rules decide how useful the privilege really is:

• Original principal vs. current balance. Most lenders base the lump-sum percentage on the original amount borrowed, which is more generous; a few use the shrinking current balance.
• Calendar year vs. anniversary date. Some allowances reset every January 1st, others on the anniversary of your closing date. The reset date determines when you can stack two years of privileges close together.
• Frequency and minimums. Some lenders accept lump sums any time, in amounts as small as $100; others allow only one per year, or only on payment dates.
• No-frills exceptions. Some deeply discounted mortgages strip privileges down or remove them entirely in exchange for a lower rate.

Use it or lose it

At most lenders, unused privilege room does not carry forward. Skip the lump sum this year and the allowance simply resets; there is no accumulating room. That makes the privilege a recurring window rather than a bankable asset, and it rewards borrowers who automate something every year, even a small amount, over those waiting for one big someday payment.

Two ways to put privileges to work

The everyday strategy is steady acceleration: an annual lump sum from a bonus or tax refund, a permanent payment increase, or switching to accelerated biweekly payments, which uses a slice of the increase allowance automatically.

The situational strategy matters when you plan to break the mortgage. The penalty is calculated on your outstanding balance, so making your maximum lump-sum prepayment first shrinks the balance the formula applies to. At lenders with anniversary or calendar resets, well-timed breaks can even fit two years of allowances in before the payout. Check your room before you break; the prepayment penalty entry covers the rest of that playbook.

To find your own privileges, look at the prepayment section of your mortgage agreement, your annual mortgage statement, or your renewal offer. Most lenders also show remaining room in online banking, and the numbers reset to the full allowance each privilege year.