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What Are Pre-Payment Privileges and How Do They Work?

Pre-payment privileges give homeowners the right to put extra payments towards their mortgage without risk of pre-payment penalties. Typically offered on closed and fixed-term mortgages, you may be able to take advantage of the variety of pre-payment options available, depending on the conditions outlined in your mortgage contract:

Boosting Payments

Depending on the lender, you could be eligible to increase your overall mortgage payment amount either annually, once a term or at your leisure, based on the terms of your loan. On average, approved increase amounts will range from 10 to 25% of your regular payment amount, with the additional funds being applied directly to your mortgage principal.

i.e. A mortgage payment of $1,000 per month may be increased to $1,250 ($1,000 x 25% = $1,250)

Lump-Sum Payments

Your lender may also give you the option to make a larger, lump-sum payment once or several times a year. While permitted lump-sum amounts will vary by lending institution, you may be able to pay as much as 25% on the total remaining principal. Keep in mind, any additional payments made may also affect your lump-sum payment amount (more on that below).

i.e. If your original loan amount was $100,000, the lender may allow you to contribute an additional $25,000 in an annual lump-sum payment

Additional Payments

Extra payments may also be an optional pre-payment privilege. Just how many payments you’ll be able to make (and when) will once again depend on the lending institution - who may allow you to make one or several extra payments throughout the year. There are also instances where the lender may even allow you to “double-up,” in which case you may be able to double your monthly mortgage payment amount for a limited period of time.

Shorter Amortization

Simply put, the amortization period is how long you have to pay off your mortgage loan. During the application process, your lender will give you the choice of a 1, 3, 5, or 10-year term with a (typical) amortization period of 25 years.

At the end of every term, you’ll have the option to renew and reduce your amortization period (i.e. from 15 years to 10 years), allowing you to increase your monthly payments and pay your loan off faster (and at a lower interest rate, depending).

Note: Be sure to talk to your mortgage broker before negotiating renewal terms

Are you thinking of renewing or refinancing your mortgage? Fill out our quick and easy application form today, and we’ll get started on finding you a great product at an even better rate!

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