A prepayment privilege is a right built into most closed Canadian mortgages to pay down extra principal, beyond the regular scheduled payment, without triggering a penalty — up to a defined limit each year. This is the borrower's built-in flexibility valve inside an otherwise closed product, and it exists specifically so that a client with extra cash isn't locked out of reducing their debt faster just because they're in the middle of a fixed term.
Privileges commonly come in two forms, sometimes both offered on the same product: a lump-sum option allowing a one-time or occasional payment up to a percentage of the original principal balance each year, and a payment increase option allowing the client to raise their regular payment amount by up to a percentage, which then stays elevated for the rest of the term. Exact percentages vary meaningfully by lender and product — figures like 10%, 15% or 20% of the original balance for the lump-sum option are commonly seen across the market, but none of them should be presented to a client as a universal rule; always confirm the specific privilege on the specific product in front of you.
Because both the IRD and three-months'-interest formulas from Module 01 are calculated against the outstanding balance, reducing that balance before the penalty is calculated directly reduces the dollar penalty. A client who has unused privilege room available, and who knows they're going to break the mortgage anyway — for a switch, a refinance, or a sale that doesn't qualify for a bona fide sale exemption — should generally use that available room first, immediately before the break, rather than letting it go unused. The math is straightforward: a smaller balance produces a smaller three-months'-interest figure and a smaller IRD figure, whichever ends up applying.
Sometimes the underlying problem a client describes — wanting extra cash flow relief, wanting to pay down debt faster — doesn't actually require breaking or refinancing the mortgage at all. A client who has been consistently under-using their available privilege room has more flexibility already built into their existing mortgage than they may realize, and redirecting a windfall or extra savings into the existing privilege, rather than assuming a refinance is the only lever available, can sometimes solve the actual goal at no cost at all.
Most prepayment privileges reset on an annual or anniversary basis and do not accumulate if left unused — a client who doesn't use this year's room generally doesn't get double the room next year to make up for it. This makes the decision of when to use available privilege room a genuinely strategic one rather than a use-it-whenever afterthought: a client planning a port to a smaller mortgage, discussed in Module 07, or a switch that will involve a partial break, benefits from using any available room immediately beforehand rather than earlier in the year on something less consequential.
A client is about to port their mortgage to a smaller property and will owe a partial penalty on the difference in balance. They still have unused prepayment privilege room for this year. What should they consider first?
Both penalty formulas scale with the outstanding balance, so paying down principal with available privilege room before the port directly shrinks the number the partial penalty gets calculated against — this is exactly the kind of deliberate timing this module is built around. Saving the room for next year assumes it carries forward, which most privileges don't, and using it after the port is too late to affect a penalty that's already been calculated on the pre-port balance.
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