Making Extra or Lump-Sum Mortgage Payments

A prepayment is a lump-sum payment that you make, in addition to your regular mortgage payments, before the end of your mortgage term. The prepayment reduces your outstanding balance and allows you to pay off your mortgage faster. 

Most mortgage contracts permit you to make extra payments towards your mortgage principal balance beyond your regular payment. Making extra payments reduces your outstanding mortgage balance and allows you to pay off your mortgage faster. As your mortgage balance goes down, the proportion of each regular payment that goes towards interest is reduced and the proportion to principal increases. The sooner your balance owing goes down, the less interest you pay and the faster you are mortgage free.


  • Your mortgage agreement will specify whether you can make prepayments, when you can do so and other related terms or conditions
  • Generally, 'closed' mortgages have an annual prepayment privilege maximum of 15-20% of the initial mortgage balance. For example, for an initial total loan amount of $300,000, a 20% annual prepayment privilege would mean you can prepay up to an extra $60,000 per year without penalty. (An 'open' mortgage mean you are free to make whatever extra payment you like without penalty.)
  • Some "no frills" mortgage contracts offer lower mortgage rates in return for reduced annual prepayment maximums of 0-10% and other restrictions, such as how often extra payments can be made. So read this term carefully if you intend to make extra-payments.
  • The annual prepayment amount is generally not cumulative, meaning use it up during the contract year or loose it.
  • Normally, you can make as many extra-payments per year as you like, usually subject to a minimum dollar amount and on a regular payment date.
  • In addition to your maximum annual extra-payment privilege, some lenders also allow you to increase your monthly payment once each year by as much as +20%, year-over-year. Further, some also allow you to double-up any regular payment on the regular payment date. These extra options are typically cumulative, meaning doing one does not cut into or restrict the other. So if you are serious about paying your mortgage down, make sure your mortgage broker presents lender options with aggressive pre-payment options.

Questions to Ask

When shopping for a mortgage, make sure that you understand the prepayment options and conditions before you sign the contract.

For any lender under consideration, ask the following questions:

  • How much can I prepay without paying a fee or penalty?
  • Is there a minimum amount for a prepayment?
  • When can I make prepayments?
  • Are there any conditions?
  • If there are fees or penalties, how much are they, and how are they calculated?

Example Mortgage Extra-Payment Scenario

Michael owns a rental property in addition to his own home. Michael plans to sell the rental property in the next spring market and expects to have net equity after the sale of about $100,000, which he would like to put towards the mortgage balance on his own home, his principal residence.

Michael checks and confirms his home mortgage has a 15% annual prepayment privilege and the initial loan amount was $500,000, meaning he can put up to $75,000 per year without penalty. The anniversary date for his mortgage is July 31st and he has been making only the regular monthly payments.

Mike sells his rental in the spring and nets the $100K as planned. He chooses to put $75,000 immediately to his mortgage to use up his pre-payment privilege for the current contract year, and set aside the other $25,000 in savings until August arrives where his annual pre-payment privilege resets for the next contract year. He then makes another $25,000 lump sum payment and - by splitting his extra-payments between contract years - has avoided a penalty for overpaying and knocked years off his mortgage repayment.


You can save thousands of dollars in interest by paying off your mortgage as fast as your household budget allows. These four ways will help you to achieve the goal of being mortgage-free sooner:

  1. increasing the amount of your payments (in fact, by simply increasing your payment by only 10% each year and nothing else, you will cut your mortgage amortization / pay off period in half)
  2. keeping your payments the same amount if you renew or renegotiate your mortgage with a lower interest rate
  3. choosing an accelerated payment schedule
  4. making lump-sum prepayments.

With your mortgage paid off, you can direct your household budget to help you achieve other financial goals.

Free Guide: Paying Off Your Mortgage Faster 

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