Mortgage & Wealth Strategies

Don't Forget About Your Prepayment Privileges: They Can Unlock Savings & Save You Thousands

November 6, 2024 | Posted by: Matt Broom-Hall

When it comes to paying down your mortgage, every bit counts—and many homeowners are sitting on opportunities to save big without realizing it. Prepayment privileges allow you to make extra payments toward your mortgage, reducing your interest costs and potentially shaving years off your term. Let’s break down how these privileges work and look at some real-life scenarios to see just how much you can save.

What Are Prepayment Privileges?

Prepayment privileges let you make additional payments on your mortgage principal without penalty. Most lenders offer these options, but the limits vary. Some lenders allow up to 15%, while others go up to 20% of the original mortgage amount per year. Here’s a quick look at prepayment privileges with some common lenders:

15% Prepayment Privileges

• Lenders: First National, Strive Capital, Scotia Bank, TD

• Options:

  • Pay up to 15% of the original principal balance on any payment date

  • Double your monthly payments on any payment date

  • (For fixed-rate mortgages) Increase payment by 15% once per year

20% Prepayment Privileges

• Lenders: ATB, RFA, CMLS, MCAP, Servus, CWB

• Options:

  • Pay up to 20% of the original principal balance on any payment date

  • Double your monthly payments on any payment date

  • (For fixed-rate mortgages) Increase payment by 20% once per year

Tip: Always confirm with your lender to ensure these details are current, as terms and limits may vary.

How Prepayment Privileges Can Benefit You

Using your prepayment privileges has two main benefits:

1. Interest Savings: By paying down the principal faster, you reduce the amount of interest charged over the life of the mortgage.

2. Shortened Mortgage Term: Extra payments reduce the principal balance, which can shave years off your mortgage term.

Let’s explore some scenarios to see the potential savings.

Scenario 1: Making Annual Lump Sum Payments

Mortgage Details:

• Original Mortgage Amount: $500,000

• Interest Rate: 5%

• Amortization Period: 25 years

• Monthly Payment: Approximately $2,908

Option A: 15% Prepayment Privilege (First National, Strive Capital, Scotia Bank, TD)

Let’s say you have a mortgage with First National and use your 15% prepayment option. You decide to make an additional lump sum payment of $75,000 (15% of $500,000) once a year for the first three years.

Impact:

• By applying $75,000 extra each year for three years, you could save over $100,000 in interest over the life of the mortgage.

• You could also reduce your amortization by around 8 years, finishing your mortgage in 17 years instead of 25.

Option B: 20% Prepayment Privilege (ATB, RFA, CMLS, MCAP, Servus, CWB)

If you have a mortgage with a 20% prepayment privilege, you could pay $100,000 (20% of $500,000) each year. Let’s see how this would impact your mortgage:

Impact:

• With an extra $100,000 payment each year for three years, you could save over $140,000 in interest.

• You could reduce your mortgage term by almost 10 years, paying it off in approximately 15 years.

Scenario 2: Doubling Your Monthly Payments

If making large lump-sum payments isn’t feasible, many lenders also allow you to double your monthly payments. Let’s see how that impacts your mortgage.

Mortgage Details:

• Original Mortgage Amount: $500,000

• Interest Rate: 5%

• Amortization Period: 25 years

• Monthly Payment: Approximately $2,908

By doubling your monthly payment to $5,816, here’s what happens:

Impact:

• Interest Savings: Over the life of the mortgage, you could save more than $150,000 in interest.

• Time Saved: You could pay off your mortgage in just over 12 years instead of 25.

This option is powerful for those who can afford it, as it drastically cuts down on both the term and interest.

Scenario 3: Annual Payment Increase

For fixed-rate mortgages, many lenders allow you to increase your regular payment amount once per year by a set percentage—15% or 20%, depending on the lender.

Mortgage Details:

• Original Mortgage Amount: $500,000

• Interest Rate: 5%

• Amortization Period: 25 years

• Monthly Payment: Approximately $2,908

Option A: 15% Annual Increase (First National, Strive Capital, Scotia Bank, TD)

If you increase your monthly payment by 15%, your new monthly payment would be $3,344.

Impact:

• By keeping this increased payment over the life of the mortgage, you could save over $60,000 in interest.

• You could shorten your mortgage by approximately 4 years.

Option B: 20% Annual Increase (ATB, RFA, CMLS, MCAP, Servus, CWB)

With a 20% increase, your new monthly payment would be $3,490.

Impact:

• This increase could lead to savings of over $80,000 in interest.

• You could pay off your mortgage in around 20 years instead of 25, shaving off 5 years.

Why You Should Consider Prepayment Privileges

Utilizing prepayment privileges is an effective way to reduce the cost and length of your mortgage without significant financial strain. Even small adjustments, like increasing your payments by 15% or 20%, can result in significant savings over time. By taking advantage of these privileges, you’re not only reducing your debt faster but also building equity in your home more quickly.

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