Definition
Prepayment privileges are the rights granted by your mortgage contract to reduce principal without triggering a penalty. They typically take two forms: (1) annual lump-sum payments (often 10% to 20% of the original principal, in one or more installments), and (2) a one-time or permanent increase in regular payment amount.
These privileges are calculated on the **original principal** (the initial amount), not the remaining balance — which is more generous. For example, on a $400,000 loan, a 15% privilege allows $60,000 in additional principal payments per year without penalty.
Comparing privileges across lenders is often overlooked but can be highly valuable over 5 years. A lender with a rate 0.05% lower but 10% privileges vs. another at 20% can cost more overall for a borrower with variable income or cyclical savings.