Mortgage Prepayment Calculator

How Mortgage Prepayments Work

Mortgage prepayments (also called extra payments or lump sum payments) are additional payments you make toward your mortgage principal beyond your regular payment amount. Since these extra payments go directly toward reducing your principal, they can significantly reduce the total interest you pay over the life of your mortgage and help you become mortgage-free years earlier.

Benefits of Making Extra Mortgage Payments

Massive Interest Savings: Even small extra payments can save tens of thousands in interest. For example, paying an extra $200/month on a $400,000 mortgage at 5.5% could save over $80,000 in interest.

Faster Mortgage Freedom: Extra payments can shave years off your mortgage. The same $200/month extra payment could reduce a 25-year mortgage by 6-7 years.

Build Equity Faster: Each extra payment increases your home equity, giving you more financial flexibility.

Guaranteed Return: The interest you save is effectively a guaranteed return equal to your mortgage rate, which often beats returns from other investments (after tax).

Canadian Mortgage Prepayment Privileges

Most Canadian mortgages include prepayment privileges that allow you to make extra payments without penalty. Common prepayment options include:

• Percentage Increase: Increase your regular payment by up to 10-20% of the original amount (varies by lender)
• Lump Sum Payments: Make annual lump sum payments up to 10-20% of the original principal (varies by lender)
• Double-Up Payments: Some lenders allow you to double your regular payment at any time
• Accelerated Payments: Switch to accelerated bi-weekly or weekly payments

Important: Always check your specific mortgage contract for prepayment privileges and restrictions. Exceeding your prepayment limits may result in penalties.

Smart Prepayment Strategies

Start Early: Extra payments have the biggest impact early in your mortgage when the majority of each payment goes toward interest.

Be Consistent: Regular small extra payments are often more powerful than occasional large lump sums because they compound over time.

Use Windfalls: Apply tax refunds, bonuses, or inheritances directly to your mortgage principal.

Round Up Payments: Round your payment to the nearest hundred (e.g., pay $2,500 instead of $2,465).

Accelerated Bi-Weekly: This payment schedule effectively makes one extra monthly payment per year.

When NOT to Prepay Your Mortgage

While prepayment is powerful, it's not always the best strategy:

• High-Interest Debt: Pay off credit cards or other high-interest debt first
• No Emergency Fund: Build 3-6 months of expenses in savings before aggressive prepayment
• Employer RRSP Match: Maximize employer matching contributions first (free money)
• Better Investment Returns: If you can reliably earn more after-tax than your mortgage rate, investing may be better
• Low Interest Rate: If you have a rate below 3%, investing may provide better returns