What Are Prepayment Privileges?
Prepayment privileges are the amount you can pay toward your mortgage above your regular payments without incurring a prepayment penalty. They are a key feature of most Canadian mortgages, allowing you to reduce your principal balance and save on interest over time.
For TD mortgages, prepayment privileges include both lump-sum payments and the ability to increase your regular payment amount. Understanding these options helps you make informed decisions about accelerating your mortgage payoff.
- Lump-sum payments: make a one-time payment directly to your principal.
- Payment increases: raise your regular payment amount to pay down the mortgage faster.
Sources: Financial Consumer Agency of Canada, TD Canada Trust
TD Prepayment Options: Lump-Sum and Increase Payments
TD offers two main types of prepayment privileges on its closed mortgages. First, you can make a lump-sum prepayment of up to 15% of the original principal amount per calendar year without a prepayment charge. Second, you can increase your principal and interest payments by up to 100% of the original payment amount during the term, also without a charge.
These privileges allow you to put extra money toward your mortgage when your budget allows, helping you build equity faster and reduce total interest paid.
- Closed TD mortgages: lump-sum prepayment up to 15% of original principal per year.
- Closed TD mortgages: increase payments by up to 100% of original payment amount.
- Open TD mortgages: no prepayment charge for any amount.
Sources: TD Canada Trust
How Prepayments Reduce Interest Costs
Making prepayments reduces the principal balance of your mortgage. Because interest is calculated on the remaining principal, a lower balance means less interest accrues over time. This can shorten your amortization period and reduce the total cost of your mortgage.
Additionally, making full use of prepayment privileges each year can reduce future prepayment penalties, as penalties are based on a lower mortgage balance.
- Lower principal = less interest over time.
- Prepayments can shorten your amortization.
- Using privileges regularly may reduce future penalties.
Sources: Financial Consumer Agency of Canada, TD Canada Trust
Calculating the Impact of Prepayments
To estimate how prepayments affect your mortgage, you can use a prepayment calculator. TD provides a mortgage prepayment calculator that lets you input your mortgage details and see the impact of lump-sum payments or payment increases. The calculator uses your mortgage balance, interest rate, and amortization to show potential savings.
To see the effect on your own mortgage, you can list your current balance, interest rate, and remaining amortization, then compare scenarios with and without a lump sum or a payment increase. The exact savings will depend on your terms.
- Use TD's mortgage prepayment calculator to model different scenarios.
- Input your mortgage balance, rate, and amortization to see potential savings.
- Compare lump-sum versus payment increase options.
Sources: TD Canada Trust
Prepayment Penalties and Limits
While TD allows the prepayment privileges described above, amounts beyond those limits may incur a prepayment charge. For a closed fixed-rate TD mortgage, the prepayment charge is the greater of three months' interest or the interest rate differential (IRD). For a closed variable-rate TD mortgage, the charge is three months' interest. For an open TD mortgage, there is no prepayment charge for any amount.
It's important to review your mortgage contract to understand your specific prepayment limits and any potential penalties. Many lenders may not allow carrying unused prepayment amounts to the next year, so you may want to use your full privilege each year if you have extra funds.
- Closed fixed-rate: charge is greater of three months' interest or IRD.
- Closed variable-rate: charge is three months' interest.
- Open mortgage: no prepayment charge.
- Unused prepayment amounts may not carry over to the next year.
Sources: Financial Consumer Agency of Canada, TD Canada Trust
Frequently asked questions
Can I make a lump sum prepayment on my TD mortgage?
Yes, if you have a TD closed mortgage, you can make a lump-sum prepayment of up to 15% of the original principal amount per calendar year without a prepayment charge. For open mortgages, there is no limit and no prepayment charge.
Sources: TD Canada TrustWhat is the typical prepayment limit for a TD mortgage?
For TD closed mortgages, the typical prepayment limit is 15% of the original principal amount per calendar year for lump-sum payments. You can also increase your principal and interest payments by up to 100% of the original payment amount during the term.
Sources: TD Canada TrustHow much can I increase my monthly payment without penalty?
On a TD closed mortgage, you can increase your principal and interest payments by up to 100% of the original payment amount during the term without a prepayment charge.
Sources: TD Canada TrustWhat is the best time to make a prepayment?
The best time to make a prepayment is when you have extra funds available and have used your full prepayment privilege for the year. Consider your overall financial situation before prepaying.
Sources: TD Canada TrustSources
- Mortgage fees: Prepayment penalties — Financial Consumer Agency of Canada
- Mortgage Prepayment Calculator — TD Canada Trust