Prepayment Calculator: See the Impact of Extra Payments on Your Mortgage
Hi, WealthTrack founder David Pipe here. When most Canadians think about paying off their mortgage, they picture making regular monthly or bi-weekly payments for 20 or 25 years until the balance finally hits zero. But what if you could knock years off your mortgage and save thousands of dollars in interest—just by making extra payments along the way?
That’s the power of mortgage prepayments. Even small lump sums, made strategically, can have a huge impact on your total costs and payoff timeline. A prepayment calculator lets you see exactly how much of a difference those extra dollars make, so you can decide whether it’s worth it to put extra cash toward your mortgage.
In this guide, we’ll break down how prepayments work, the different ways to make them, the benefits and limitations, and how to use a calculator to map out your savings.
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What Is a Mortgage Prepayment?
A mortgage prepayment is any payment you make on top of your regular scheduled payments. Instead of simply following your lender’s payment schedule, you contribute extra money to reduce your principal balance.
There are two main types of prepayments:
Lump sum prepayments – A one-time extra payment, such as $1,000 at the end of the year, a tax refund, or a bonus from work.
Increased regular payments – Boosting your ongoing monthly or bi-weekly payment by a set amount (e.g., paying $100 extra per month).
Both methods reduce the principal faster, which means less interest accrues over time.
Why Do Prepayments Matter?
Mortgages are structured so that in the early years, most of your payment goes toward interest, not principal. By paying down the principal faster, you reduce the interest charged in future months. This creates a snowball effect, where each prepayment increases the impact of your future regular payments.
For example:
Mortgage: $400,000 balance, 25-year amortization, 5% interest
Regular monthly payment: $2,338
If you add just $5,000 as a lump sum in year 1, you’ll save over $7,000 in interest and shorten your amortization by about 10 months.
Now imagine making that extra payment every year—you could shave several years off your mortgage.
How a Prepayment Calculator Helps
Trying to figure out the impact of extra payments manually is complicated. A prepayment calculator makes it easy by showing:
How lump sum payments reduce your amortization period.
The total interest savings over time.
The effect of increasing regular payments vs. making one-time contributions.
Comparisons of different scenarios (e.g., $5,000 per year vs. $10,000 once).
By plugging in your mortgage details, you can see side-by-side projections and decide whether it’s worth it to put extra cash toward your loan instead of elsewhere.
Example: Lump Sum Prepayment
Imagine you have the same $400,000 mortgage, 25 years, 5% interest.
Regular payment: $2,338 per month
Lump sum prepayment: $10,000 in year 3
Without prepayment: You’ll pay about $279,000 in interest over the life of the mortgage.
With prepayment: Interest drops to about $267,000, and you’ll be mortgage-free nearly a year earlier.
That’s $12,000 saved for just one extra payment.
Example: Increasing Regular Payments
Instead of a lump sum, let’s say you increase your monthly payment by $200.
Regular monthly: $2,338 → New monthly: $2,538
Total savings in interest: about $36,000
Mortgage paid off about 4 years earlier
This method works best if you have steady income and want consistent progress.
Prepayment Privileges: What to Watch Out For
Most Canadian lenders allow prepayments, but they also place limits, called “prepayment privileges.” Common rules include:
Annual lump sum limit (e.g., up to 15–20% of the original mortgage balance per year).
Limits on increasing regular payments (often up to 100% of the original payment).
Restrictions on timing (some lenders only allow lump sums at renewal or on payment dates).
If you exceed these privileges, you may face prepayment penalties, which eat into your savings. Always check your mortgage contract before making extra payments.
The Pros of Prepayments
Save thousands in interest by reducing principal faster.
Become mortgage-free sooner, often years ahead of schedule.
Build financial flexibility—once your mortgage is gone, your income is freed up for other goals.
Psychological relief—knowing you’re chipping away at your debt faster can bring peace of mind.
The Cons of Prepayments
Liquidity trade-off – Once you put money into your mortgage, it’s not easily accessible without refinancing or a HELOC.
Opportunity cost – Extra cash could potentially earn more if invested elsewhere (e.g., in RRSPs, TFSAs, or other investments).
Restrictions and penalties – Exceeding prepayment limits can result in unexpected costs.
Strategies for Effective Prepayments
Use windfalls – Tax refunds, bonuses, or inheritances are perfect for lump sum payments.
Round up your payments – If your payment is $2,338, round to $2,400 or $2,500; you won’t notice the difference as much.
Automate it – If allowed, set your lender to automatically increase your regular payments.
Combine approaches – Add small increases monthly and occasional lump sums for maximum effect.
Check your privileges – Always know your lender’s limits before making extra payments.
When Prepayments May Not Be Right for You
While prepayments can be powerful, they’re not always the best use of your money. You might hold off if:
You have higher-interest debt (credit cards, personal loans) that should be paid first.
You lack an emergency fund—it’s risky to tie up all your extra cash in your mortgage.
You can earn higher returns through investing—especially if mortgage rates are relatively low.
The Bottom Line
Prepayments are one of the simplest, most effective ways to save money and pay off your mortgage faster. Even small extra payments add up to big savings over time. A prepayment calculator helps you visualize the impact of different scenarios—whether you’re adding lump sums, boosting regular payments, or both.
The key is to balance your mortgage goals with your overall financial health. If you’ve got the cash flow and want to reduce debt sooner, prepayments can shave years off your mortgage and save you tens of thousands in interest.
So before you decide what to do with your next bonus, tax refund, or savings boost, try running the numbers through a prepayment calculator. You might be surprised how much faster you can reach mortgage freedom.
