Apply it early in the amortization
In the first years of a mortgage, most of each payment is interest. A lump sum in year two saves interest for the remaining twenty-three years; the same sum in year twenty saves it for five. Early prepayments routinely save two or three dollars of interest per dollar prepaid.
Know your privilege window
Prepayment allowances usually reset on the mortgage anniversary, not the calendar year. A lump sum in December and another in January, if they straddle your anniversary, can deploy two years of privileges two weeks apart. Miss the window and the unused room is gone; it does not carry forward.
- Confirm your anniversary date, not the calendar year
- Unused annual privilege does not roll over
- Split large sums across the anniversary if needed
Order of operations
Before the mortgage gets a dollar: credit cards and high-interest debt first, emergency fund second, employer-matched savings third. After those, the mortgage is a strong home for surplus, especially for conservative savers who would otherwise park it in a low-yield account.
The tax refund loop
Contribute to your RRSP, apply the refund to the mortgage, repeat annually. It is not clever, it is just consistent, and consistency over ten years is how ordinary incomes produce mortgages that end in year seventeen instead of year twenty-five.
Keep the line of retreat open
Prepayments are one-way: the money goes in and does not come out without qualifying to borrow it back. If your income is variable or an expense looms, park the lump sum in savings until the picture clears. A slightly slower payoff beats a liquidity crunch.
Frequently asked questions
- Is a lump sum better than increasing my payments?
- Mathematically similar. Lump sums suit irregular income; payment increases suit steady salaries. Many people do both with their annual privilege room.
- Can I prepay more than my annual privilege?
- Yes, but the excess triggers a prepayment penalty on the overage. Stay inside the privilege unless the term is ending anyway.
- Does a prepayment lower my monthly payment?
- Not automatically. It shortens the amortization. At renewal you can re-amortize to lower the payment if cash flow matters more than speed.