Most financial independence discussion is about investing: ETFs, fees, asset allocation and withdrawal rates. But for a lot of us, the mortgage is the biggest number on the balance sheet, and it rarely gets the same attention beyond “what rate did you get?”
When I was shopping for my mortgage, I was focused on the rate too. My broker changed my mind. He asked how aggressively I planned to pay it down, then walked me through the prepayment privileges, which I hadn’t even looked at. The lowest rate I was quoted only let me increase payments by 10%. A slightly higher rate came with accelerated bi-weekly payments, a 15% increase and double-ups.
The comparison
I ran the numbers on a $700,000 mortgage over 30 years, comparing two lenders:
- Lender A: 4.29%, payment increase of up to 10%, no double-up
- Lender B: 4.49%, accelerated bi-weekly, payment increase of up to 15%, double-up any payment
| Scenario | Payment | Total interest | Paid off in |
|---|---|---|---|
| 4.29%, contract payment | $3,444/mo | $540K | 30 years |
| 4.49%, contract payment | $3,525/mo | $569K | 30 years |
| 4.29% at its maximum (+10%) | $3,789/mo | $439K | 25 years |
| 4.49% + 7.5% increase (same $3,789/mo) | $3,789/mo | $483K | 26 years |
| 4.49%, accelerated bi-weekly | $1,763 every 2 weeks | $472K | 25 years 7 months |
| 4.49%, accelerated + 15% | $2,027 every 2 weeks | $359K | 20 years |
| 4.49%, accelerated + 15% + double-up | $4,054 every 2 weeks | $130K | 8 years |
Assumes a new mortgage, privileges used from the first payment, Canadian semi-annual compounding, and the same rate for the whole amortization (ignoring renewals). It’s meant to compare the lenders, not to predict an exact payoff.
What the table means
1. Same cash, the lower rate wins. Paying exactly the same amount each month, the 4.29% mortgage saves about $44,000. If you’ll never prepay, take the lower rate and invest the difference.
2. Privileges are a ceiling on how fast you’re allowed to pay it off. Lender A caps you at a 10% increase. With Lender B, accelerated payments plus a 15% increase get you mortgage-free about five years sooner than Lender A’s maximum.
3. It matters for financial independence. A paid-off home before you retire lowers your expenses, and so the size of the portfolio you need. Being able to accelerate in the final stretch, or when markets look expensive, has real value even if you invest by default.
4. Prepaying is a guaranteed, after-tax return at your mortgage rate. It won’t beat expected stock market returns, but it’s not nothing once your TFSA and RRSP room is full.
5. Check whether your bi-weekly payments are accelerated. Accelerated bi-weekly works out to about one extra monthly payment a year. Regular bi-weekly saves almost nothing, and it’s an easy one to get wrong when you sign.
6. The double-up row is a ceiling, not a plan. Few people can double every payment. But it shows how much room the privileges give you if a windfall comes along during your term.
Waiting costs money
Early in a mortgage, most of each payment goes to interest, so early prepayments do the most work. Using the same example, if you only start using the privileges after a year of regular payments:
| Scenario | Starting now | Starting after 1 year | Cost of waiting |
|---|---|---|---|
| 4.49%, accelerated bi-weekly | $472K | $480K | +$8K |
| 4.49%, accelerated + 15% | $359K | $374K | +$15K |
| 4.49%, accelerated + 15% + double-up | $130K | $156K | +$26K |
Why I wrote this
I’ve spent a lot of energy optimizing the investment side of my net worth. My broker told me I had good privileges, but I never actually saw what they would save me, so I didn’t use them, and I missed real savings during my first term. If you have a mortgage, it’s worth reading your terms and running the numbers yourself.
You can do that with the free mortgage prepayment calculator. It compares two lenders like the table above and shows how much interest each privilege saves. Worthy can also track your mortgage with the privileges you actually use, and shows which one is doing the most work.