Prepaying your mortgage at renewal: lump sums, payment increases and biweekly payments

The maturity date is the one moment when you can usually pay down any amount of a closed mortgage without a prepayment penalty, because the term has ended. If you have savings you will not need as an emergency fund, a lump sum at renewal lowers the balance before the new rate applies and saves interest for the rest of the amortization. During the new term, annual prepayment privileges (often 10% to 20% of the original balance as a lump sum, and similar payment increases) let you keep paying down without penalty. Before prepaying, compare the mortgage rate with what the same money could earn after tax in a TFSA or RRSP, and keep a cash buffer.

This guide is part of the mortgage renewal checklist. Figures are illustrative.

The two ways to use a lump sum

Illustrative figures: $400,000 balance at renewal, 20 years left, 4.50% fixed, semi-annual compounding, rate assumed constant. Lump sum at maturity: $20,000.

Option	Payment	Time to pay off	Total interest
No lump sum	$2,521.62	20 years	$205,188.95
Lump sum, payment lowered (20 years)	$2,395.54	20 years	$194,929.50
Lump sum, payment kept at $2,521.62	$2,521.62	222 months (18.5 years)	$178,066.99

Lowering the payment saves $126.08 a month and about $10,259 of interest.
Keeping the payment the same shortens the mortgage by 18 months and saves about $27,122 of interest.

Keeping the payment is the stronger saving; lowering it helps if the renewal payment is otherwise too high. Ask your lender which approach it applies when you prepay at renewal, and tell it what you want.

Prepayment privileges during the term

Privilege	Typical form	What to check
Annual lump sum	A percentage of the original balance per calendar or anniversary year	Whether unused room carries forward (usually not)
Payment increase	Raise the regular payment by a percentage, once a year	Whether you can lower it again later
Double-up payments	Pay an extra payment on any payment date	Whether it counts against the lump-sum limit
Payment frequency	Monthly, semi-monthly, biweekly, weekly, accelerated versions	Change fees, if any

Privileges vary between lenders and between products from the same lender. "Limited features" mortgages often have smaller privileges. When comparing renewal offers, put privileges next to the rate; see the renew or switch worked example.

Accelerated biweekly payments

An accelerated biweekly payment is half the monthly payment, paid every two weeks. There are 26 biweekly periods in a year, so you pay the equivalent of 13 monthly payments instead of 12.

Illustrative: $400,000 at 4.50% over 25 years.

Monthly payment: $2,213.89; total interest about $264,168
Accelerated biweekly: $1,106.95 every two weeks; paid off in about 21.7 years; total interest about $224,105

The saving, about $40,063, comes from paying more each year, not from any trick. Plain (non-accelerated) biweekly payments, which equal the annual monthly total spread over 26 payments, save only a small amount.

Prepay the mortgage or invest?

A rough guide: prepaying earns a guaranteed, tax-free return equal to your mortgage rate. Compare it with:

TFSA: growth is tax-free, so compare the mortgage rate with the expected return after fees. A guaranteed investment at a lower rate than your mortgage is usually beaten by prepaying.
RRSP: the contribution gives a tax deduction, which can make it attractive at higher marginal tax rates, especially if the refund is then put on the mortgage.
Emergency fund: money paid onto a closed mortgage is hard to get back. A home equity line of credit can provide access, but at a variable rate and subject to approval.
Higher-interest debt: pay off credit cards and consumer loans before prepaying the mortgage.

This is general information; a fee-only financial planner can help you weigh it for your tax situation.

Worked check before prepaying at renewal

Keep an emergency fund, for example three to six months of essential costs.
Pay off any debt at a higher rate than the mortgage.
Check whether a lump sum would move you into a lower rate tier; see what determines your renewal rate.
Confirm the maturity-date prepayment is penalty-free with your lender or the new lender.
Decide whether to lower the payment or keep it.
Put the new balance into the renewal payment calculator to check the payment.

Mistakes to avoid

Emptying savings into the mortgage and then borrowing on a credit card for an emergency
Missing the maturity-date opportunity and then being limited by annual privileges
Making a prepayment above the annual privilege during the term and triggering a penalty
Choosing a new product with weaker privileges for a tiny rate saving when you plan to prepay heavily
Assuming unused privileges carry forward to next year

If you need a lower payment rather than a faster payoff, compare a lump sum with extending your amortization.

Frequently asked questions

Can I prepay any amount at renewal?

Usually yes, on the maturity date, because the term has ended. If you renew early, the old term's privileges may still apply, so check with your lender.

Does a lump sum at renewal lower my rate?

Only if the lender prices by loan-to-value tiers and the payment moves you into a lower tier.

Should I switch to accelerated biweekly at renewal?

If you can afford the extra annual amount, it is a simple way to shorten the amortization. Check that it fits your pay schedule.

Are prepayment privileges based on the original or current balance?

It depends on the lender. Many base the lump-sum limit on the original principal of the mortgage, so check your agreement.

Sources

Financial Consumer Agency of Canada — prepayment options and payment frequency
Canada Revenue Agency — TFSA and RRSP rules and contribution limits
Justice Laws Website — the Interest Act