Prepayment privileges let you pay extra on your mortgage without a penalty. Every extra dollar goes straight to your balance, so you pay less interest and finish years sooner. Here are the four main ways to use them, with real numbers.
What are prepayment privileges?
Each payment you make covers interest and pays down some of your balance (the principal). Prepayment privileges let you pay more than your regular payment. The extra goes 100% to principal.
Most closed mortgages allow something like 10% to 20% of the original amount as a lump sum each year, and a 10% to 20% payment increase. Check your own mortgage for the exact limits.
Our examples all use a $500,000 mortgage at 5.54% over 25 years, with a regular monthly payment of $3,063.61.
1. Lump-sum payments
Put a set amount on your mortgage once a year, such as a tax refund or bonus.
| Extra each year | Total interest | Paid off in |
|---|---|---|
| None | $419,082 | 25 years |
| $1,000 | $393,808 | 23 years, 9 months |
| $2,500 | $371,714 | 22 years, 7 months |
| $5,000 | $319,283 | 19 years, 9 months |
2. Raise your regular payment
Even rounding up helps. Rounding $3,063.61 up to $3,100 a month, an extra $36.39, takes about 7 months off and saves about $12,026 in interest.
| Payment | Monthly amount | Paid off in |
|---|---|---|
| Standard | $3,063.61 | 25 years |
| Rounded up | $3,100.00 | 24 years, 5 months |
3. Double-up payments
Some lenders let you make an extra payment equal to your regular one. It is a good way to use a raise or bonus. If you could double every payment, the numbers change dramatically:
| Payment | Total interest | Paid off in |
|---|---|---|
| Standard monthly ($3,063.61) | $419,082 | 25 years |
| Doubled every month ($6,127.22) | $126,929 | 8 years, 7 months |
4. Accelerated payments
Switch to accelerated weekly or biweekly payments. You make the same as 13 monthly payments a year instead of 12. That extra payment takes years off.
| Schedule | Payment | Total interest | Paid off in |
|---|---|---|---|
| Monthly | $3,063.61 | $419,082 | 25 years |
| Biweekly | $1,412.24 | $417,956 | 25 years |
| Biweekly accelerated | $1,531.80 | $346,019 | 21 years, 3 months |
| Weekly | $705.75 | $417,473 | 25 years |
| Weekly accelerated | $765.90 | $345,180 | 21 years, 2 months |
How the math works: accelerated biweekly is your monthly payment times 13, divided by 26. Regular biweekly is your monthly payment times 12, divided by 26. On a $2,000 monthly payment, accelerated biweekly is $1,000 and regular biweekly is about $923. That $77 difference every two weeks is what cuts years off.
What should I watch for?
- Going over your yearly limit can trigger a penalty.
- Some lenders only accept lump sums on certain dates, such as your mortgage anniversary.
- Most unused room does not carry over to next year. Put your anniversary date in your calendar.
Not sure what your mortgage allows? Ask a mortgage broker to check.
The bottom line
Know your limits, pick the method that fits your budget, and use your room each year. Small extra payments add up to years of freedom from your mortgage.
Disclaimer: These numbers are estimates based on a $500,000 mortgage at 5.54% compounded semi-annually over 25 years. Your results will depend on your own mortgage terms. This is not a commitment to lend, a pre-approval or an approval. Rates change without notice.
Talk to us
Want to see what extra payments would do for your mortgage? Book a call with Lisa or Kelly, or phone 289-723-2126.
Common questions
How much can I prepay on my mortgage without a penalty?
Most closed mortgages allow a lump sum of about 10% to 20% of the original amount each year and a 10% to 20% payment increase. Check your own terms for the exact limits.
Do accelerated biweekly payments really save money?
Yes. You make the same as 13 monthly payments a year instead of 12. On a $500,000 mortgage at 5.54%, that can save about $73,000 in interest and take almost four years off.
Does unused prepayment room carry over?
Usually not. Most lenders reset your prepayment room each year, so room you do not use is gone.