How Mortgage Clients Can Take Advantage of Their Pre-Payment Privilege

When you secure a mortgage, one of the most valuable tools at your disposal is the pre-payment privilege. Many lenders offer this feature allowing homeowners to make extra payments toward their mortgage principal without penalties. Taking full advantage of this privilege can help you pay off your mortgage faster and save thousands of dollars in interest. Here’s what you need to know.

1. What is a Pre-Payment Privilege?

A pre-payment privilege is an option that allows mortgage holders to make additional payments on their mortgage principal—above and beyond their regular scheduled payments—without incurring penalties. Depending on your lender, these extra payments could be lump sums or regular increases to your scheduled payments.

In Canada, many lenders allow you to make pre-payments of up to 10% to 20% of the original mortgage balance each year. These payments go directly toward reducing your principal, which can significantly shorten your amortization period and reduce the amount of interest you’ll pay over the life of your mortgage.

2. Why Take Advantage of Your Pre-Payment Privilege?

1. Pay Off Your Mortgage Faster
By applying extra payments directly to the principal, you can reduce the balance faster, which means you’ll pay off your mortgage sooner. For example, making a lump sum payment at the start of each year can cut down your amortization period by several years.

2. Save on Interest
One of the biggest benefits of pre-paying your mortgage is the amount of interest you’ll save. Mortgages in Alberta can span 25 to 30 years, and over that time, interest adds up quickly. By reducing the principal sooner, you minimize the amount of interest that accrues, potentially saving tens of thousands of dollars.

3. Financial Flexibility
If you receive a bonus at work, a tax refund, or any unexpected income, applying that extra cash toward your mortgage can be a smart financial move. It’s an effective way to make progress on your debt without making long-term changes to your budget. Use pre-payment privileges strategically, when you have extra funds, to reduce future financial burdens.

3. How to Use Your Pre-Payment Privileges Effectively

1. Know Your Lender’s Policy
Each lender has different rules regarding pre-payment privileges, so it’s important to know the details of your mortgage agreement. Some allow you to increase your regular payments by a certain percentage, while others may offer lump sum payment options up to a specified limit. Ask your lender about your pre-payment options and how much you can contribute each year.

2. Start Early
The earlier you begin making pre-payments, the more interest you’ll save. Even if you can only afford small additional payments, every dollar counts toward reducing your principal balance. Over time, these contributions will compound, leading to substantial savings in interest.

There is a great pre-payment calculator here to see how pre-payments can reduce your amortization.

3. Automate Your Pre-Payments
If your lender allows you to increase your regular mortgage payments, consider setting up automated pre-payments. By adding a small amount to each monthly payment, you’ll barely notice the difference in your budget, but over time, it can significantly reduce your mortgage balance and save on interest.

4. Who Should Take Advantage of Pre-Payment Privileges?

While pre-payment privileges are beneficial for many homeowners, they’re particularly useful for those who:

• Want to be mortgage-free sooner: If your goal is to eliminate debt quickly, regular pre-payments can fast-track your progress.

• Have stable finances: If you have a steady income and can comfortably cover your monthly expenses, using extra funds to reduce your mortgage can be a smart move.

• Have extra income: If you receive bonuses, inheritances, or tax refunds, applying these windfalls toward your mortgage can help you reduce your overall debt.

Conclusion

Taking advantage of your mortgage pre-payment privileges is one of the most effective strategies to pay off your mortgage faster and save on interest. By understanding the terms of your mortgage, making small extra payments, and using windfalls wisely, you can gain financial freedom sooner than expected. If you’re unsure about how to start, contact me to discuss how you can best use your pre-payment privileges and create a plan that fits your financial goals.