Prepayment privileges are one of the most powerful—and underused—tools for building wealth through your mortgage. Used strategically, they can save you tens of thousands of dollars and shave years off your mortgage. Here's how to maximize them.
What Are Prepayment Privileges?
Prepayment privileges allow you to pay down your mortgage faster than your regular payments require, without penalty:
- Lump sum prepayments: Extra payments toward principal
- Payment increases: Higher regular payments
- Double-up payments: Make additional payments
Key point: These are penalty-free within limits. Exceed the limits, and penalties apply.
Types of Prepayment Privileges
Lump Sum Prepayments
Make additional payments toward principal:
| Lender Type | Typical Limit | Timing |
|---|---|---|
| Big 5 Banks | 10-20% of original principal | Annually |
| Monoline lenders | 15-20% of original principal | Annually |
| Credit unions | 10-20% of original principal | Varies |
Example: $500,000 mortgage with 15% prepayment privilege = $75,000 extra per year allowed
Payment Increases
Increase your regular payment amount:
| Lender Type | Typical Limit |
|---|---|
| Big 5 Banks | 10-20% increase |
| Monoline lenders | 15-25% increase |
| Credit unions | 10-20% increase |
Key feature: Usually cumulative over the term
Double-Up Payments
Make additional payments matching your regular payment:
- Usually allowed anytime
- Up to your regular payment amount
- Goes directly to principal
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Review your mortgage options with us. We'll ensure you get strong prepayment privileges that match your goals.
The Math: How Prepayments Save You Money
Scenario: $500,000 mortgage at 4.5%, 25-year amortization
| Strategy | Years Saved | Interest Saved |
|---|---|---|
| $5,000 lump sum annually | 4.2 years | $48,500 |
| $10,000 lump sum annually | 7.1 years | $82,000 |
| 10% payment increase | 2.8 years | $34,000 |
| 20% payment increase | 5.2 years | $61,000 |
| $200/month extra (bi-weekly) | 3.5 years | $42,000 |
The Power of Early Prepayments
Prepayments early in your mortgage save more because you're reducing the principal that compounds:
- Year 1: $10,000 prepayment saves ~$11,000 in interest
- Year 15: $10,000 prepayment saves ~$4,000 in interest
Takeaway: If you can only prepay sometimes, prioritize early years.
Prepayment Strategies
Strategy 1: Annual Bonus
Apply work bonuses or tax refunds as lump sum prepayments:
- Timing: After you receive bonus/refund
- Amount: Up to your annual limit
- Impact: Significant if consistent
Strategy 2: Bi-Weekly Accelerated Payments
Switch from monthly to bi-weekly accelerated:
- You make 26 half-payments instead of 12 full payments
- Effectively one extra monthly payment per year
- Typical savings: 3+ years and $30,000+ on $500K mortgage
Strategy 3: Round Up Payments
Increase payments to a round number:
- Payment of $2,834? Make it $3,000
- Extra $166/month = $2,000/year to principal
- Barely noticeable, significant impact over time
Strategy 4: Match Payment to Budget Improvements
As income increases, increase payments:
- Got a raise? Increase payment by the same amount
- Paid off car loan? Redirect that payment to mortgage
- Lifestyle inflation avoided, wealth building accelerated
Understanding Prepayment Dates
Anniversary Date Method
Most common—your prepayment year runs from anniversary to anniversary:
- Mortgage start: March 1, 2024
- Prepayment year 1: March 1, 2024 - February 28, 2025
- Limit resets: March 1, 2025
Strategy: Make prepayments early in each anniversary year to maximize interest savings.
Calendar Year Method
Some lenders reset privileges on January 1:
- Simpler tracking
- December/January can allow double prepayments (end of one year, start of next)
FAQ
Q: When is the best time to make a lump sum prepayment?
A: As early as possible in your mortgage, and as early as possible in your prepayment year. Every month earlier saves more interest.
Q: Can I exceed my prepayment limits?
A: You can, but you'll pay a penalty on the excess amount. Calculate whether the penalty is less than the interest savings (rarely worth it unless you're paying off entirely).
Q: Do prepayment privileges reset each year?
A: Yes—unused privileges don't carry over. Use them or lose them each year.
Q: Are prepayment privileges the same at all lenders?
A: No—they vary significantly. This should be a key consideration when choosing a mortgage. We help clients compare these features.
Q: What happens to my prepayment if I have a variable rate?
A: Prepayments work the same way regardless of rate type. With variable rates, prepayments are especially powerful as they're reducing principal that otherwise compounds at changing rates.
What's Next
Prepayment privileges are a key factor in choosing a mortgage. Get pre-approved with us and we'll ensure you get strong prepayment options that align with your wealth-building goals.
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