Can You Overpay Your Mortgage? How It Works, Max Limits, and How It Speeds Up Your Payoff
Overpaying your mortgage can be one of the smartest financial moves you make. It can save you thousands in interest and cut years off your repayment schedule.
But there is a catch. Every lender in Canada has its own rules about how much extra you can pay before triggering a penalty. If you do not know those limits, you could wipe out your savings with a prepayment charge.
What Are Prepayment Privileges?
Prepayment privileges are the extra payments you are allowed to make toward your mortgage principal without paying a penalty.
They usually come in two forms:
Lump sum payments – A one-time or multiple payments directly applied to your principal balance.
Payment increases – Increasing your regular mortgage payment amount so more money goes toward the principal each month.
Common Limits in Canada
While every lender is different, most follow similar guidelines:
Lump sum payments: Often capped at 10% to 20% of your original principal balance per year.
Payment increases: Often capped at 10% to 20% of your regular payment amount per year.
Some lenders allow you to do both in the same year, giving you more flexibility.
Example: If you have a $400,000 mortgage and your lender allows a 20% lump sum annually, you could pay up to $80,000 in extra principal each year without penalty.
Why Overpaying Helps
Faster principal reduction – Every extra dollar you pay reduces your balance, which reduces the interest charged on the next payment.
Interest savings – You can save tens of thousands over the life of your mortgage.
Shorter amortization – Overpaying regularly can cut years off your repayment period.
Example: On a $400,000 mortgage at 5.5% interest over 25 years, adding $500 to your monthly payment could save over $78,000 in interest and shorten the term by about 5 years.
Pitfalls to Avoid
Exceeding your annual limit – Paying more than your privilege allows can trigger a penalty.
Paying outside of allowed times – Some lenders only allow lump sums on your mortgage anniversary date. Read your mortgage documents carefully to ensure you’re strategizing appropriately.
Smart Prepayment Strategies
Use a lump sum before breaking your mortgage – If you know you are going to break your mortgage and you have the money available, it can save you money to use your prepayment privilege first.
Example: When you pay out your mortgage in full, prepayment privileges no longer apply. That means if your balance is $300,000 and your lender allows a 20% lump sum, you could put $60,000 toward the balance before breaking the mortgage. The penalty is then calculated on $240,000 instead of $300,000, which can make a significant difference in cost.
How to Find Your Limits
Check your original mortgage commitment – Your prepayment privileges will be outlined here, including the maximum percentage for lump sums and payment increases.
Contact your lender or mortgage broker – They can confirm the exact amounts and dates for your privileges.
Watch for reset dates – Some lenders reset your privileges each calendar year (January 1), while others reset them on your mortgage anniversary date (the day your mortgage funded). Knowing which system your lender uses can help you time your payments so you get two opportunities back-to-back — for example, in December and then again in January if your lender resets at year-end.
Why this matters: If you go over your prepayment limit, the extra amount you paid is treated almost like a mini version of a full prepayment penalty. Instead of being charged as if you were paying off your entire mortgage early, you are charged a similar penalty — but only on the portion of the loan you overpaid. These penalties can still be costly and wipe out the benefit of overpaying in the first place.
Pro Tip: If maximizing prepayments is important to you, make sure your broker knows. They can match you with a lender that offers a higher ceiling for prepayment privileges and help you track your reset dates so you never miss an opportunity — or accidentally trigger a penalty.
The Bottom Line
Overpaying your mortgage can be a powerful tool, but only if you do it within your lender’s rules. By understanding your prepayment privileges, you can pay down your debt faster, save thousands in interest, and avoid penalties.
I can review your mortgage and show you exactly how much you can prepay without penalty, then create a plan to maximize your savings.
📩 Book your free consult today to find out how to save years on your mortgage.
Jeff Dinsmore
Mortgage Broker
FSRA # 10315
VeloMortgage.ca
TMG - The Mortgage Group