A $400,000 mortgage at 5.5% costs over $340,000 in interest over a standard 25-year amortization. That's nearly the price of a second home — paid purely in interest. The good news: with the right prepayment strategy, you can slash that figure dramatically without changing your lifestyle much at all.
Our mortgage prepayment calculator shows exactly how much interest you save and how many years you shave off with any combination of extra monthly payments and annual lump sums.
Why extra payments work so well
In the early years of a mortgage, the vast majority of your regular payment goes to interest — not principal. On a $400,000 mortgage at 5.5%, your first month's payment of roughly $2,455 includes about $1,833 in interest and only $622 in principal. Extra payments go directly to principal, immediately reducing the balance that future interest is calculated on. The compounding effect works powerfully in your favour.
Strategy 1: Extra monthly payments
Adding even a modest amount to your regular payment creates significant long-term savings:
| Extra Monthly Payment | Interest Saved | Years Saved | New Payoff |
|---|---|---|---|
| $100/month | ~$28,000 | ~1.5 years | 23.5 years |
| $300/month | ~$68,000 | ~4 years | 21 years |
| $500/month | ~$99,000 | ~6 years | 19 years |
| $1,000/month | ~$152,000 | ~9 years | 16 years |
Based on $400,000 mortgage at 5.5% over 25 years. Use the prepayment calculator for your exact numbers.
Strategy 2: Accelerated bi-weekly payments
This is the simplest prepayment strategy — it requires no extra cash and no discipline. Here's how it works:
- Regular monthly payments: 12 payments × your monthly amount = 12 months of payments per year
- Accelerated bi-weekly payments: 26 payments × (monthly ÷ 2) = 13 months of payments per year
The "accelerated" part means you're effectively making one extra full monthly payment per year without noticing it. On a $400,000 mortgage at 5.5%, switching to accelerated bi-weekly saves approximately $38,000 in interest and shaves about 3 years off your amortization — at no extra cost, just a different payment frequency.
Strategy 3: Annual lump-sum payments
Most Canadian mortgage lenders allow you to make lump-sum payments each year without penalty — this is called your prepayment privilege. Typical allowances:
- Big 6 banks: usually 10–20% of the original mortgage balance per year
- Monoline lenders: often 15–20%, sometimes more
- Timing: usually on or after each anniversary date; some allow anytime
A $10,000 lump sum in year 5 on a $400,000 mortgage at 5.5% saves roughly $24,000 in total interest and cuts about 1.5 years off your amortization. The earlier you make lump-sum payments, the bigger the impact — every dollar you prepay early reduces the base on which all future interest is calculated.
Exceeding your prepayment privilege triggers a prepayment penalty — typically 3 months' interest or the Interest Rate Differential (IRD), whichever is greater. IRD penalties on fixed-rate mortgages can be enormous — sometimes $20,000–$40,000+. Always check your mortgage contract for your exact limits before making a large lump-sum payment.
Strategy 4: Increase your payment amount at renewal
When your mortgage term ends (typically every 5 years), you renegotiate your rate and terms. This is the perfect time to increase your payment amount — either to maintain the same amortization at a higher rate, or to voluntarily pay more to shorten your amortization. Many Canadians don't realize they can simply ask their lender for a higher payment at renewal with no penalty whatsoever.
What about mortgage penalties: when NOT to prepay
Breaking your mortgage mid-term to refinance is different from making permitted prepayments. If you want to refinance early to get a better rate, the penalty can eliminate years of rate savings:
- Variable rate penalty: usually 3 months' interest — typically $3,000–$6,000 on most mortgages
- Fixed rate penalty: the greater of 3 months' interest or the IRD — can be $15,000–$50,000+ depending on rate differential and time remaining
The general rule: use prepayment privileges (extra payments within your allowed limit) freely. Only break your mortgage entirely if the long-term savings clearly outweigh the penalty — which usually requires running detailed numbers with a mortgage broker.
Calculate your exact prepayment savings
Enter your remaining balance, rate, and extra payment amount to see your interest savings, time saved, and new payoff date side by side.
→ Calculate My Prepayment SavingsFrequently asked questions
How much can I prepay on my Canadian mortgage without penalty?
Most Canadian lenders allow 10–20% of the original mortgage amount as extra payments per year. Check your mortgage contract for the exact amount — it varies by lender and mortgage product. Some lenders also allow increasing your regular payment by 10–20% per year.
What is accelerated bi-weekly mortgage payment?
Accelerated bi-weekly means paying half your monthly payment every two weeks (26 payments/year instead of 24). This results in one extra monthly payment per year, saving roughly 3 years and $38,000 on a $400,000 mortgage at 5.5% — at no extra cost compared to monthly payments.
Is it better to make lump sum payments or increase monthly payments?
Both save interest and shorten your amortization. Lump sums have a bigger immediate impact because they reduce principal dramatically in one hit. Regular extra monthly payments are more sustainable and build a habit. Many Canadians do both — small monthly increases plus an annual lump sum using tax refunds or bonuses.
When is the best time to make a lump sum mortgage payment?
Earlier is always better — the sooner you reduce the principal, the less interest accumulates on a lower balance for the remaining term. Making a lump sum in year 1 saves significantly more than the same amount in year 15. Always check your mortgage anniversary date requirements before submitting a lump sum.