How Does a Lump-Sum Mortgage Payment Work?

A lump-sum mortgage payment is a one-time additional payment toward your mortgage principal. It can come from savings, a work bonus, an inheritance, a tax refund or other available funds.

Because the additional payment reduces your mortgage principal, future interest is calculated on a smaller balance. Depending on your mortgage terms, this can potentially save a significant amount of interest over time.

Example

Imagine you have a $500,000 mortgage and receive $25,000 that you decide to put toward your mortgage. Instead of keeping the mortgage balance at $500,000, the lump-sum payment can reduce the principal to approximately $475,000, subject to the lender’s rules and timing.

The earlier a lump-sum payment is made, the greater its potential impact can be because the lower balance has more time to reduce future interest costs.

Check Your Mortgage Prepayment Rules

Before making a large lump-sum payment, check your mortgage contract. Canadian lenders commonly have specific prepayment privileges and limits. Going beyond those limits could result in a prepayment charge.