A prepayment privilege is a feature in some mortgages that allows borrowers to pay off their loan faster without incurring penalties. It gives flexibility to make extra payments on top of regular installments.
How It Works
Lenders set specific limits on how much extra you can pay each year. For example, many mortgages allow lump-sum payments of up to 10–20% of the original mortgage amount annually, or the option to increase regular payments by a set percentage.
Benefits
- Faster repayment: Reduce the principal more quickly and save on interest costs.
- Flexibility: Make extra payments when you have surplus cash, like a bonus or tax refund.
- Lower long-term cost: The more you prepay, the less interest you pay over the life of the mortgage.
Limitations
Prepayment privileges vary by lender and product. Paying more than the allowed amount may trigger penalties. Borrowers should confirm the rules in their mortgage agreement to avoid unexpected fees.
Final Thoughts
Prepayment privileges are valuable tools for becoming mortgage-free faster. Using them wisely can save thousands in interest, but it’s important to know the limits set by your lender.