What prepayment privilege means in Canadian mortgages and how it affects flexibility, penalties, and faster repayment.
Prepayment privilege is the borrower’s contractual right to pay extra toward the mortgage without triggering the normal prepayment penalty, up to the limits allowed by the mortgage.
Prepayment privilege is one of the most practical mortgage features in Canada. It affects how quickly a borrower can reduce principal, whether annual bonuses can be applied efficiently, and how much flexibility exists on a closed mortgage.
Many Canadian mortgages allow annual lump-sum payments, payment increases, or both. The exact privilege is set by the contract. Some lenders allow a percentage of the original principal to be prepaid each year without penalty. Others use different formulas or timing rules.
This is why “closed” does not always mean no flexibility. It often means flexibility exists, but only inside the prepayment privilege stated in the mortgage.
If a borrower receives a year-end bonus, the borrower may be able to use it to make a lump-sum prepayment within the mortgage’s annual allowance. That can reduce the remaining principal faster without triggering a penalty.
Borrowers sometimes assume any extra payment is allowed without cost. That is not true. Extra payments above the contract privilege can trigger a penalty.
It is also common to confuse prepayment privilege with an open mortgage. An open mortgage usually allows much broader repayment freedom than a standard closed product.
The size, timing, and calculation of the privilege vary by lender and product. Missing the anniversary window or exceeding the limit can change the result materially.