Mortgages: Mortgage prepayment options in Canada
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Mortgage prepayment is the ability to pay more than the scheduled monthly payment on your loan, which means you will pay off your loan in less time and have less interest over time. Sounds great if you have the funds, right? However, it’s not always that simple, and it’s essential to understand the specific terms and conditions of your mortgage contract before committing to it. There are two different options for authorized prepayments. You can get an increase in your allowance on your monthly mortgage payment. This means you can add to your regular monthly payment, which slightly reduces your amortization period. For example, you could pay $2,000 per month and increase that amount to $2,250. You are in fact allowed to double your monthly payment if you have the ability to do so. The other option is a lump sum payment that allows you to allocate a larger amount of money to pay down the principal of your mortgage. A study published by CAAMP suggests that in 2010, 28% of Canadians took advantage of an early repayment option. The lump sum payment is limited to 25% of your balance. However, it also means that you could technically pay off your mortgage in four years if you wanted to.
Disadvantages of prepaying a mortgage
Of course, making extra payments on your mortgage will shorten the amortization period of your mortgage. As a result, over time, you will pay less interest and save money. However, there are potential drawbacks. For example, let’s say you increased your mortgage contributions by $500 per month and managed to save $50,000 in interest payments over the life of your mortgage. If you had chosen to invest that $500 per month over the same period of time, it’s quite possible that you would have earned a return in excess of $50,000. This is what we might call an opportunity cost.
Other ways to pay off your mortgage faster
Another method of shortening your mortgage term and reducing your amortization period is to switch from a monthly payment period to a weekly (or accelerated biweekly) payment period. You can avoid paying penalty fees by changing your payment period and still have the ability to accelerate your mortgage amortization. More frequent payments can actually reduce your depreciation by several years. For example, let’s say you spend $1,000 a month on your mortgage. That means you spend $12,000 a year on your mortgage ($1,000 x 12). If you switched to a weekly payment plan, you would pay $250 per week, but $13,000 per year ($250 x 52 weeks). That means you’re paying an extra $1,000 a year on your mortgage without really feeling the impact. This clearly shows that more frequent payment options applied to your mortgage can significantly reduce the amortization of your loan. It is not uncommon for the impact to be such that you can pay off a 25-year mortgage in 20-22 years, saving years of interest payments. Another option is to combine your mortgage with your current account. This means that every payment made on this current account will reduce your mortgage. However, each withdrawal will increase it. Therefore, based on a net cash flow into or out of the account, your mortgage will be affected. For example, let’s say you earned $50,000 net of taxes in the year, which was transferred to your bank account. You then spent $20,000 on food and general living expenses from that same account. Your mortgage would be reduced by $30,000 ($50,000 – $20,000 = $30,000). However, it is definitely worth discussing this option with an expert, and possibly with your loved ones. This is not an option for those who do not have a good handle on their budget and finances.
Accelerated biweekly or monthly?
According to the Financial Consumer Agency of Canada (FCAC), an accelerated biweekly payment is your monthly payment divided by 2. A regular biweekly payment is your monthly payment multiplied by 12, then divided by 26. Only the accelerated version increases what you pay each year. Here is the difference for a $2,000 monthly payment.
| Frequency | Payment | Total per year |
|---|---|---|
| Monthly | $2,000 | $24,000 |
| Biweekly | $923.08 | $24,000 |
| Accelerated biweekly | $1,000 | $26,000 |
| Accelerated weekly | $500 | $26,000 |
The extra $2,000 a year equals one additional monthly payment. That money pays down your principal faster and shortens your amortization. Renewal is also a good time to change your payment frequency.
Small yearly prepayments or one large one at renewal?
During the term, a closed mortgage caps penalty-free lump-sum payments. At CIBC, for example, this privilege ranges from 10% to 20% of the original principal per year depending on the product, as of September 2026. At the end of the term, however, the FCAC says you can make a lump-sum payment, and CIBC states that its mortgages become open at maturity. A large payment at renewal therefore falls outside the annual cap.
To decide, compare two rates. Every dollar you prepay now saves interest at your mortgage rate, with certainty. Waiting and investing that money only pays off if the return, after tax and fees, beats that rate, and that return is not guaranteed. If your lender is a member bank of the Canadian Bankers Association, its annual statement shows the amount you can prepay each year without a penalty.
Why are mortgage prepayment options so popular?
Your personal situation can change dramatically during the life of your mortgage. For example, you may get a new job with a significantly higher salary or receive a huge unexpected bonus. As a result, your desire to pay off your mortgage sooner may also change significantly; it’s just hard to predict. It is not uncommon for cash flow to increase significantly over the life of your mortgage, and many people experience this. By applying this increased cash flow to your mortgage, you can significantly reduce the total amount of interest you will pay and allow you to live mortgage-free sooner than the original term of your mortgage. In a survey conducted by CAAMP, a total of 84% of Canadians said they believed they could afford to pay at least $300 more per month on their mortgage payments. Many Canadians have shown that they like to take advantage of prepayment options to reduce their mortgage debt. In 2011, 16% of Canadians increased their monthly payments, 5% increased the frequency of their payments (for example, from monthly to weekly), and 17% took advantage of the opportunity to put a lump sum of up to 25% on the remaining balance of their mortgage.
Prepayment penalties
Some lenders will charge a penalty if you pay more than the allowed extra amount on your mortgage. It is important to understand the terms of your mortgage to understand the potential impact of paying additional amounts on your mortgage. Prepayment penalties can cost thousands of dollars. Discuss your options with your mortgage broker or lender to find out exactly where you stand on potential penalties or fees.
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