This time of year I get the same question from a lot of clients: “I’ve got a bonus coming / some savings sitting there. Should I throw it at the mortgage?”

Sometimes yes. Sometimes no. And a lot of people don’t know what their mortgage actually lets them do without a penalty. So here’s how I walk clients through it.

What prepayment privileges are

Most closed mortgages let you pay extra each year without a penalty. These are your prepayment privileges. They usually come in two forms:

1. Lump sum payment. A one-time extra payment straight onto principal, up to a % of your original mortgage amount each year. Many lenders allow somewhere around 10% to 20%, but it varies a lot.
2. Payment increase. You bump up your regular payment by a set %. That higher payment then goes on for the rest of the term (some lenders let you lower it back later, some don’t).

Some lenders also let you “double up” a payment. Again, depends on the lender.

Every dollar of prepayment goes to principal. That means less interest for the rest of the mortgage, and it adds up fast.

Why year end matters

Here’s the part people miss. With a lot of lenders the privilege is use it or lose it. If you don’t use this year’s lump sum, it doesn’t carry forward.

The catch is “this year” isn’t always January to December. Some lenders reset on the calendar year. Others reset on your mortgage anniversary date. So before you plan anything, pls check:

1. Your lump sum % and your payment increase %
2. Whether it resets Jan 1 or on your anniversary
3. Minimum amount per prepayment (some lenders have one)
4. How many lump sums you can make per year
5. How to actually submit it (online banking, form, call the lender)

All of this is in your mortgage commitment or the lender’s terms. If you can’t find it, send me your lender name and mortgage number and I’ll help you dig it up.

Go over the limit and you pay a penalty

Anything above your privilege is a prepayment charge. On a closed mortgage in Canada, that’s usually the greater of 3 months’ interest or the interest rate differential (IRD) for fixed rates, and typically 3 months’ interest for variable. The IRD on a fixed can get expensive, so don’t guess. Ask the lender for a written penalty quote first.

When I’d tell you NOT to prepay

Paying down the mortgage feels good. It isn’t always the smartest move. I’d look at these first:

1. High interest debt. Credit cards, car loans, a line of credit at a higher rate. Pay those first. Almost always.
2. No emergency fund. Once money is in the mortgage, it’s hard to get back out. Keep a cushion.
3. RRSP / TFSA / FHSA room. Depending on your tax bracket and goals, contribution room may give you a better return than prepaying. Talk to your accountant or advisor on this one. I’m the mortgage guy, not your tax guy.
4. Renewal is coming up soon. If your term ends in the next few months, you may be able to pay down a bigger chunk at renewal with no penalty at all. Worth waiting.
5. You’re thinking about a HELOC or refinance next year. If you’ll need the equity back for a reno or investment, let’s map that out before you lock cash into the mortgage.

A simple way to think about it

If you’ve got no expensive debt, a healthy emergency fund, and you’re not planning to pull equity soon, prepaying is a solid, low-risk way to save interest. You’re basically getting a “return” equal to your mortgage rate — without market risk.

If any of the points above apply, let’s talk first. 10 min on the phone usually sorts it out.

Other ways to pay it off faster

If a lump sum isn’t in the cards, these help too:

1. Switch to accelerated biweekly or weekly payments
2. Round up your payment, even $50 or $100
3. Put raises toward a payment increase instead of lifestyle creep
4. At renewal, keep your amortization shorter if the payment still works for you

Want me to look at your mortgage?

Send me your current mortgage statement and I’ll tell you what your prepayment options are, when they reset, and whether prepaying makes sense vs. other options. No cost, no pressure.

Call 416-840-6368
Email: info@everythingmortgages.ca
Web: everythingmortgages.ca

Manzeel Patel, Mortgage Broker
Everything Mortgages | Brokerage Lic# 12755

This article is general education, not financial advice. Prepayment rules and penalties vary by lender and mortgage. Check your commitment or ask for a written quote before you prepay.