Use the calculator
Try the Prepayment Calculator to put these concepts into practice.
Key takeaways
- ✓Most Canadian lenders allow 10–20% lump sum prepayments per year without penalty
- ✓You can also typically increase your regular payment by 10–20% per year
- ✓Exceeding limits triggers an IRD or 3-months interest penalty — which can be very large
- ✓Canadian mortgages compound semi-annually — this affects the effective monthly rate
- ✓Variable rate mortgages generally allow unlimited prepayments
Canadian prepayment privileges explained
Unlike US mortgages, Canadian fixed-rate mortgages limit extra payments during the term. Most lenders offer two privileges:
1. Lump-sum prepayments: Usually 10–20% of the original mortgage balance per year. On CA$560,000 original balance at 20%, that's CA$112,000/year in lump sums.
2. Regular payment increase: Usually 10–20% above your original payment. If your original payment was CA$3,394/month, a 20% increase privilege allows boosting to CA$4,073/month.
These privileges typically reset annually on the mortgage anniversary date. Unused privileges don't carry forward. Variable rate mortgages generally allow unlimited prepayments — one of their key advantages for disciplined borrowers.
💡 Tip: If you receive an annual bonus, directing it to a mortgage prepayment within your privilege limit is one of the most financially efficient habits a Canadian homeowner can build.
Prepayment penalties: IRD vs 3-months interest
Exceeding your prepayment privilege or breaking your mortgage early triggers a penalty — the greater of:
1. Three months interest: Calculated on the outstanding balance at the current rate.
2. Interest Rate Differential (IRD): The difference between your rate and the lender's current rate for a matching remaining term, applied to the prepayment amount.
When rates have fallen since you signed, IRD penalties can be CA$20,000–CA$60,000+ on a typical mortgage. When rates have risen, IRD may approach zero (only 3-months interest applies).
Big bank IRD calculations have drawn significant criticism for being consumer-unfavourable. Credit unions often use simpler, more transparent penalty formulas.
The Canadian compounding difference
Canadian mortgages compound semi-annually — not monthly like most other countries. The stated annual rate is "nominal." The effective monthly rate is: (1 + annual rate/2)^(1/6) - 1.
For a 5.5% stated rate: Monthly: 5.5%/12 = 0.4583% per month Semi-annual compounding: (1.0275)^(1/6) - 1 = 0.4532% per month
Small difference but meaningful over a 25-year amortization. The Prepayment Calculator applies correct Canadian semi-annual compounding for accurate results.
Lump sum vs regular payment increase
Both types effectively reduce your outstanding balance faster. Strategically:
Lump sum is better when you have irregular income (bonus, commission, inheritance) or want a one-time reduction.
Payment increase is better when you have reliably higher income and want automated acceleration — it removes the temptation to spend.
For maximum impact, combine both: make a 10% lump sum annually (using your tax refund or bonus) while maintaining a 10% payment increase from renewal. This combination can compress a 25-year amortization by 7–10 years.
Frequently Asked Questions
Calculators mentioned in this guide
Disclaimer: Calculations are estimates for informational purposes only and do not constitute financial advice. Mortgage rules, taxes, and CMHC insurance requirements vary by province. Consult a licensed mortgage broker before making financial decisions.