Mortgage Prepayment Calculator (Canada)

What the mortgage prepayment calculator does

The calculator shows how much interest you save, and how much sooner the loan is gone, if you put extra money against your mortgage. From your balance, rate and remaining amortization it compares two paths: regular payments only, and regular payments after a one-time lump sum plus a fixed extra amount every month.

The two main results are the interest saved over the life of the loan and the months taken off the amortization. Both come from a full month-by-month amortization.

Why prepayment saves so much

Interest is charged on the outstanding balance each month. Early in the loan the balance is large, so most of each payment is interest. A prepayment lowers the balance directly, so less interest is charged in every remaining month.

A lump sum acts at once and in full: $20,000 applied today stops interest on that $20,000 for the rest of the amortization. An extra monthly payment chips away at principal a little faster each month, and the effect grows as the balance falls. Combining the two pays the mortgage off fastest.

How the calculation works

• Your annual rate is converted into an effective monthly rate using semi-annual compounding.
• The tool solves for the regular payment that clears your balance over the remaining amortization.
• A baseline run at that payment with no prepayment totals the interest.
• A second run subtracts your lump sum from the starting balance, adds your extra amount to every payment, and totals the new interest and number of months.

The difference between the runs gives the interest and months saved; months divided by twelve gives years saved.

A worked example

Take a $400,000 balance at 5% with 25 years remaining. The regular payment is about $2,326 a month, and with no prepayment the borrower pays about $297,926 in interest.

Add a $20,000 lump sum at the start and $200 extra every month. The loan is repaid in 236 months instead of 300, 64 months or about five years and four months early. Interest falls to about $214,443, a saving of about $83,483.

The lump sum alone saves about $1,000 of interest in the first year ($20,000 x 5%), and because the balance stays $20,000 lower for the rest of the amortization, that saving repeats and compounds. That is why a lump sum paid early does far more than the same amount paid late.

How to use the results

Try an extra monthly amount on its own to see what a steady habit achieves, then a lump sum alone to weigh a bonus, tax refund or inheritance against other uses for the money, then both together. Prepayments matter most early, so running the numbers at the start of a term usually shows the biggest gain.

Prepayment privileges vary by lender

Open mortgages let you prepay any amount at any time with no penalty. Closed mortgages, which most Canadians choose for the lower rate, grant annual privileges instead, commonly a lump sum of 10 to 20 percent of the original balance each year and a similar increase to the regular payment.

Details differ. Some lenders reset the privilege each calendar year, others on the mortgage anniversary; some let unused room carry forward, most do not. Exceeding the privilege triggers a charge calculated much like an early-payout penalty, which can wipe out the saving. Check your agreement or ask your lender how much you may prepay and when.

Common mistakes with prepayments

• Prepaying beyond your annual privilege and triggering a charge.
• Waiting until late in the loan, when the balance and the interest on it are smaller.
• Putting a lump sum on the mortgage before building an emergency fund. Money paid against the mortgage is hard to get back.
• Assuming today’s rate lasts. You will renew over a long amortization, and the saving moves with the renewal rate.

Assumptions and limits

The calculation assumes one fixed rate until payoff, level payments and that every prepayment is allowed without penalty. It ignores property tax, insurance and fees, which do not affect the interest comparison. For a binding answer, and to confirm how much you may prepay without a charge, speak with your lender or a licensed mortgage professional.

This article is general information only and is not financial advice.

About This Tool: Mortgage Prepayment Calculator Canada

Mortgage prepayment calculator Canada: use this tool to get an instant estimate based on the figures you enter. Adjust the inputs above to match your situation, or browse all our calculators to plan your next step.