Prepayment Privileges & Penalties, Explained

Prepayment privileges let you pay down your mortgage faster without penalty, while prepayment penalties are what you owe if you break your mortgage before the end of its term.

Prepayment privileges

Most lenders let you make extra payments in a few ways, each capped as a percentage of your original mortgage:

• Lump-sum payments — typically 10% to 20% of the original principal per year
• Increased regular payments — typically up to 10% to 20% more than your contracted payment, sometimes higher
• Payment frequency changes, like switching to accelerated bi-weekly payments
• Special options like skipping a payment or doubling one up, depending on the lender

Prepayment penalties

If you break a closed mortgage before maturity — by paying it off, transferring it, or refinancing — most lenders charge whichever is higher:

• Three months' interest on your outstanding balance
• The interest rate differential (IRD) — based on the gap between your current rate and today's rate for a similar remaining term

Variable-rate mortgages are simpler: the penalty is almost always three months' interest, regardless of how rates have moved. How a lender calculates its IRD can make a real difference to the payout, which is worth asking about before you sign.