Extra Payments: Reduce Principal & Save Interest
Strategic guide to making extra mortgage payments and calculating your interest savings
Quick Summary
Extra mortgage payments go directly to principal, reducing your total interest costs and shortening your amortization period. Even small additional payments can save thousands of dollars over time.
How Extra Payments Work
When you make your regular mortgage payment, it's split between principal and interest. Early in your mortgage, most goes to interest. Extra payments go entirely to principal, which:
- • Reduces the principal balance faster than scheduled
- • Decreases future interest charges (calculated on remaining principal)
- • Shortens your amortization period by paying off the loan sooner
- • Builds equity faster in your home
Extra Payment Strategies
Monthly Extra Amount
Add a fixed amount to each payment (e.g., $100/month).
Annual Lump Sum
Make one large payment per year (tax refund, bonus, etc.).
Payment Frequency Switch
Change to accelerated bi-weekly (equivalent to one extra monthly payment per year).
Rate Drop Strategy
When rates drop, keep same payment amount instead of lowering it.
Real-World Example: $500K Mortgage
Scenario Details:
Regular Payments Only
+$200 Extra/Month
Savings Summary
When NOT to Make Extra Payments
Extra payments aren't always the best financial strategy. Consider these alternatives first:
High-Interest Debt
Pay off credit cards (18%+ interest) before extra mortgage payments (5% interest). The math is clear: eliminate higher-rate debt first.
No Emergency Fund
Build 3-6 months of expenses in savings before extra payments. Mortgage equity isn't liquid in emergencies.
RRSP Room Available
If you have unused RRSP contribution room, the tax deduction might provide better returns than extra payments.
Frequently Asked Questions
Q: Should I make extra payments if I plan to move in 5 years?
A: It depends on your mortgage rate vs. investment returns. If your rate is above 6%, extra payments likely make sense. Below 4%, consider investing the extra money instead for potentially higher returns.
Q: Can I make extra payments on a fixed-rate mortgage?
A: Yes, most Canadian mortgages allow 10-20% annual prepayment privileges without penalty. Check your mortgage terms or contact your lender for specific limits.
Q: Is it better to pay extra monthly or annually?
A: Monthly extra payments save slightly more interest (compounding effect), but annual lump sums offer more flexibility. Choose based on your cash flow preferences.
Q: How much extra should I pay?
A: Start with what's comfortable - even $50-100 monthly makes a difference. Aim for 10-15% extra if possible, but never compromise your emergency fund or retirement savings.
Maximizing Your Extra Payment Impact
To get the most value from your extra payments, consider these strategic approaches that can amplify your savings:
Timing Your Payments
Make extra payments at the beginning of your mortgage term when interest charges are highest. This approach maximizes the impact on your principal balance and reduces future interest costs significantly.
Consistency Over Size
Regular, consistent extra payments are more effective than sporadic large payments. Set up automatic transfers to ensure you never miss a payment and maintain momentum toward your goal.
Adjusting Payment Amounts
As your financial situation improves, gradually increase your extra payment amounts. This strategy allows you to take advantage of windfalls like bonuses or raises without overextending your budget.
Understanding Prepayment Privileges
Canadian mortgages typically come with prepayment privileges that allow you to pay more than your scheduled amount without penalties. Understanding these limits is crucial for maximizing your extra payment strategy:
Annual Prepayment
Most fixed-rate mortgages allow 10-20% annual prepayment. This means you can pay up to 20% more than your scheduled payment amount each year without penalty.
Monthly Prepayment
Some lenders allow 10% monthly prepayment privileges, which can be particularly useful for those who want to make smaller, more frequent extra payments.
Penalty-Free Payments
Unlike some other countries, Canadian mortgages generally don't penalize extra payments. This makes it easier to adjust your payment strategy as your financial situation changes.
Calculate Your Extra Payment Strategy
Use our mortgage calculator to see exactly how extra payments would affect your mortgage and interest savings.
Try Calculator NowLast updated: January 15, 2025
Disclaimer: This guide is for educational purposes only. Your actual savings will depend on your mortgage terms, prepayment privileges, and interest rates. Consult a financial advisor for personalized advice.