Mortgage prepayment savings.
Total interest saved
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Your breakdown
Updates live as you type| Measure | No prepayment | With $10,000 per year |
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Prepayment attacks interest, not your monthly payment
Most Canadian mortgages let you pay down extra principal each year without penalty, typically 10 to 20 percent of the original balance, plus the option to increase your regular payment. The key idea this tool models is that a lump sum goes straight against principal. Because interest each month is charged on the outstanding balance, knocking that balance down early starves every future month of interest. Your scheduled payment does not change; instead the loan finishes sooner, and the savings compound the longer the amortization had left to run.
The amortization shrinks, the payment holds
This is the most misunderstood point in mortgage prepayment. Putting $10,000 against the principal does not lower your $2,752 monthly payment. It shortens the number of payments you make. The tool runs a full month-by-month amortization twice, once with no prepayment and once applying your annual lump at the start of each year, then compares total interest paid and the number of months to payoff. The simulation applies the prepayment at the very first month and on each anniversary, which front-loads the benefit.
A $400,000 balance with $10,000 paid down each year
Take the default scenario: a $400,000 balance at 5.5 percent with 20 years remaining, and a $10,000 prepayment every year. The scheduled monthly payment is about $2,752. Left alone, the mortgage runs the full 20 years and costs roughly $260,372 in interest. Adding the annual $10,000 changes the picture sharply.
The prepayment saves $103,693 in interest and shaves roughly 85 months, about 7.1 years, off the loan. Put differently, $10,000 a year of after-tax cash buys you back more than seven years of being mortgage-free and over a hundred thousand dollars you would otherwise have handed the lender.
Timing matters as much as amount
When you prepay matters as much as how much, and this tool makes an assumption worth knowing. Because the simulation applies the lump sum at the start of each year, the savings shown assume an early-in-the-year payment. If your lender only lets you prepay on the mortgage anniversary, or if you wait until December, the dollar applied works for fewer months and the benefit shrinks slightly. The same logic governs timing within your amortization. A prepayment made in year two, when the balance and the interest charge are largest, removes far more lifetime interest than the identical sum applied in year fifteen. This tool is built for homeowners with a meaningful chunk of amortization still ahead and a habit of recurring extra payments, such as redirecting an annual bonus or a tax refund. If you are within a few years of payoff, the interest left to save is small and the case for prepaying weakens.
Practical questions on prepaying
Is prepaying my mortgage better than investing the money?
It depends on the after-tax comparison. Prepaying earns you a guaranteed, risk-free return equal to your mortgage rate, 5.5 percent in this example, and that return is effectively tax-free because you are avoiding interest, not earning taxable income. To beat it inside a taxable account you would need a higher pre-tax return. Inside a TFSA or RRSP the math shifts, since investment growth there is sheltered. A common middle path is to fund registered accounts first, then direct surplus cash to the mortgage.
One timing tip that this tool understates: when you prepay matters as much as how much. Because the simulation applies the lump sum at the start of each year, the savings shown assume an early-in-the-year payment. If your lender only lets you prepay on the mortgage anniversary, or if you wait until December, the dollar applied works for fewer months and the benefit shrinks slightly. The same goes for the timing within your amortization. A prepayment made in year two, when the balance and the interest charge are largest, removes far more lifetime interest than the identical sum applied in year fifteen. This tool is built for homeowners with a meaningful chunk of amortization still ahead and a habit of recurring extra payments, such as redirecting an annual bonus or a tax refund. If you are within a few years of payoff, the interest left to save is small and the case for prepaying weakens. Run your own balance, rate, and remaining term to see where your break-even between prepaying and investing actually falls.
What happens to prepayment privileges when I renew?
Prepayment limits are set by your lender and usually reset each calendar year and at renewal. If you switch lenders at renewal you may also be able to make a penalty-free lump sum during the gap, since the old mortgage is being discharged. Watch the prepayment percentage in your contract: exceeding it can trigger a penalty even mid-term, and on a fixed-rate mortgage that penalty is the greater of three months interest or the interest rate differential, which can be steep when rates have fallen.