Prepayment Privileges and Mortgage Penalties Explained

Short answer: Prepayment privileges let you pay extra toward your mortgage without a penalty, typically a lump sum of 10% to 20% of the original balance each year and a payment increase of 10% to 20%. If you pay more than that, or break the mortgage early to refinance, sell without porting or switch, you pay a prepayment penalty: usually three months’ interest on a variable mortgage, and the greater of three months’ interest or the interest rate differential (IRD) on a fixed one.

What Are Prepayment Privileges?

Extra payments your mortgage allows each year without a penalty. Common features:

• Annual lump sum: often 10% to 20% of the original mortgage amount per year
• Payment increase: raise your regular payment by 10% to 20%
• Double up: some lenders let you double a payment

Privileges vary a lot by lender and product. Low rate “no frills” mortgages often have smaller privileges.

Why They Matter

Every extra dollar goes straight to principal, which cuts total interest and shortens your amortization. A lump sum before breaking a mortgage can also shrink the penalty.

What Is a Prepayment Penalty?

The cost of paying off or breaking your mortgage before the term ends, beyond your privileges.

Three months’ interest

Common on variable mortgages. Example: $300,000 at 5% = about $3,750.

Interest rate differential (IRD)

Common on fixed mortgages. It’s based on the gap between your rate and the lender’s current rate for the time left in your term, applied to your balance. It can be many times larger than three months’ interest, especially with a lot of time left, and big bank formulas using posted rates can make it larger still.

→ Read more: Refinancing Penalties: How They Work

How to Avoid or Reduce Penalties

• Break or refinance at renewal, when there’s no penalty
• Use your lump sum privilege first
• Port your mortgage to a new home
• Ask about blend and extend
• Choose a lender with fair penalty rules if you might move or refinance

How We Help

We compare prepayment privileges and penalty formulas across lenders so you pick a mortgage that fits your plans, not just the lowest rate. Book a call.

This article is general information, not personal financial advice. Rates, rules and programs change. Talk to a licensed mortgage broker about your situation. Lacroix Mortgage Group is licensed and powered by Mortgage Connection Inc.