What is the difference between an open and a closed mortgage for prepayments?

An open mortgage lets you make extra payments without a penalty. A closed mortgage limits the extra amount you can pay each year. Paying more than the limit may trigger a prepayment penalty, so check your contract first.

Can I carry unused prepayment room into next year?

Usually not. FCAC notes that most lenders limit prepayments per year and that unused amounts typically cannot be added to the following year. Ask your lender how its allowance works.

Is accelerated biweekly the same as biweekly?

No. Accelerated biweekly takes your monthly payment, divides it by 2 and charges it every two weeks, which adds up to roughly one extra monthly payment per year. Standard biweekly spreads the same yearly total over 26 payments.

Should I prepay my mortgage or pay down other debt first?

It depends on your rates, savings, plans and whether any of your borrowing relates to a rental or investment. That is a personal decision. Review it with a mortgage professional, and confirm any tax questions with a qualified accountant.

Mortgage Prepayment Privileges in Canada Explained

Most closed Canadian mortgages let you pay a limited amount extra each year without a penalty. Here is what those prepayment privileges usually include, where to find your own limits, and what to check before you use them.

Most closed mortgages in Canada come with prepayment privileges: a limited amount of extra money you can put toward the principal each year without paying a penalty. The Financial Consumer Agency of Canada (FCAC) lists these privileges as the main built-in ways to pay a mortgage down faster. They are easy to overlook once the contract is signed.

This guide covers what the privileges usually include, where to find your own limits, and the questions worth asking before you send extra money to the lender.

What a prepayment privilege is

FCAC describes a prepayment privilege as the amount you can put toward your mortgage on top of your regular payments without a prepayment penalty. An open mortgage lets you make extra payments without a penalty. A closed mortgage limits the extra amount you can pay each year, and anything above that limit can trigger a charge (FCAC: Mortgage prepayment, know your rights).

Privileges usually come in three forms:

Payment increases. You raise your regular payment by up to a set percentage.
Lump-sum payments. You pay an extra amount, up to a set dollar figure or a percentage of the original mortgage amount.
Payment frequency. You switch to an accelerated weekly or biweekly schedule.

The limits, timing and conditions vary from lender to lender. Your contract is the only reliable source for your own numbers.

Where to find your limits

If your lender is a federally regulated financial institution, such as a bank, it must show your prepayment privileges, penalties and other key details in an information box in the mortgage agreement. It must also describe how it calculates prepayment charges (FCAC).

Banks that follow the Code of Conduct on mortgage prepayment information go further. They send an annual statement that lists your prepayment privileges and the dollar amount you can prepay that year without a charge. They also offer a toll-free line staffed by people who can answer prepayment questions.

These federal rights apply to federally regulated institutions. If your mortgage is with a provincially regulated credit union or a private lender, read the contract closely and ask the lender to confirm your privileges in writing.

Option 1: Increase your regular payment

FCAC notes that even a small payment increase can shorten the time it takes to repay the mortgage (Paying off your mortgage faster). Two details matter here:

There is usually a yearly cap on how much you can raise the payment. Going past it may trigger a penalty.
Once you increase the payment, you normally cannot lower it again until the end of the term.

Before you raise the payment, ask your lender whether the increase is measured against your original payment or your current one, and whether you can reduce it later in the term.

Option 2: Make a lump-sum payment

Lump-sum payments come with timing rules. Depending on the lender, you may be able to make them at any time, only on certain dates, or only at set points in the term. FCAC also notes that most lenders cap the allowed prepayment per year and you usually cannot carry unused room into the next year.

Questions to ask:

Does the allowance reset on the calendar year or on the mortgage anniversary?
Is there a minimum lump-sum amount?
Does a payment increase use up any of the lump-sum allowance?

Option 3: Choose an accelerated payment schedule

Payment frequency is easy to get wrong because the names sound alike. FCAC explains the difference:

Biweekly: your monthly payment times 12, divided by 26.
Accelerated biweekly: your monthly payment divided by 2, paid every two weeks.
Weekly: your monthly payment times 12, divided by 52.
Accelerated weekly: your monthly payment divided by 4, paid every week.

The accelerated versions add up to roughly one extra monthly payment per year. The standard biweekly and weekly schedules do not. Check your statement to see which one you actually have.

Keep the payment the same when your rate drops

When you renew, or use a blend-and-extend option, you may get a lower rate. FCAC points out that if you keep your payment at the old amount instead of reducing it, more of each payment goes to principal (FCAC). Renewal is also a natural time to change your payment frequency or set a higher payment (Renewing your mortgage).

Questions to weigh before you prepay

Prepaying is a cash-flow decision as much as a mortgage decision. Money sent to a closed mortgage is generally not available again unless your product has a readvanceable feature or you apply to borrow it back. Before you use a privilege, consider:

Your reserve. Do you have savings set aside for job loss, repairs or other surprises?
Other debt. Are you carrying credit card or other debt at a higher rate than your mortgage?
Your term. Are you planning to sell, move or refinance soon? Prepayments can also affect what you owe if you break the mortgage later.
Rental properties. If you own a rental, borrowing for personal use and borrowing for a rental can be treated differently for tax purposes. The CRA's Rental Income guide (T4036) covers rental expenses in general. Which debt to pay down first depends on your situation, so confirm it with a qualified accountant before you act.
Existing strategies. If you already run rental cash damming, your rental income is applied as prepayments on your home mortgage. Your privilege limits decide how much of that income the mortgage can accept each year.

The FCAC Mortgage Calculator lets you test different payment amounts and frequencies. You can also use the MortgageFree Canada calculator to look at your own numbers.

Where MortgageFree Canada fits

MortgageFree Canada is a method for looking at your whole debt picture before deciding where extra money should go. Mortgage files are reviewed through Vine Group Mortgage Brokerage (FSRA Licence #13511). A review can confirm what your current contract allows and compare products at your next renewal. Results depend on your file, your lender and your own choices.

This article is general information, not tax, legal or financial planning advice. Confirm any tax questions with a qualified accountant.

This article is general information, not financial, tax or legal advice. Mortgage services are arranged through Vine Group Mortgage Brokerage (FSRA Licence #13511). Tax treatment varies — confirm your situation with a qualified accountant.

Mortgage Prepayment Privileges in Canada: How to Use Them Before Your Term Ends