Prepayment privileges: what 20/20 actually buys you

A privilege quoted as 20/20 grants two separate things. The first 20 is a lump sum of up to 20% of the principal, once per privilege year. The second is permission to raise your regular payment by up to 20%. They sound symmetrical and they are not remotely: a percentage of a five- or six-figure principal is an enormous number, and a percentage of a payment is not.

That matters because the pair is what borrowers compare lenders on. A 20/20 term does sound better than a 15/15 one, and it is — but almost the whole of the difference sits in the lump-sum half, which is the half most people will never use in full. If you are choosing between two lenders and you know you will never have six figures spare in one year, the number that should decide it is the payment-increase half, and that is the half nobody quotes on its own.

The allowance runs from anniversary to anniversary of your term, not from January, and room you do not use is gone at the end of it. Saving two years of allowance to pay in one go leaves the first year wasted and puts the second over its cap — where the overage is not refused at the counter, it is accepted and charged as a prepayment penalty.

It also means paying early in the privilege year is worth marginally more than paying late, for the ordinary reason that the money spends longer against the balance. That is a small effect and not a reason to rush; the reason to pay early is that people who plan to pay in December frequently do not.

One shape to watch for: some terms use a combined cap, where the lump sum and the extra principal from a payment increase draw on one shared budget rather than two independent ones. Two contracts described with identical percentages can permit very different amounts, and the word that distinguishes them is usually a single clause you have to go and look for.

A double-up lets you pay up to twice a scheduled payment, and the extra goes entirely to principal. It is a prepayment by another name, and on many contracts it draws on the same annual cap the lump sum does — which is worth confirming, because the two are advertised as though they were independent.

A skipped payment is the opposite transaction and is widely misunderstood. Skipping does not pause interest. The interest that was due is added to your principal, the balance goes up, and every payment afterwards carries interest on the larger number. It is a cash-flow tool with a long-term cost, and the cost is larger than the payment you skipped — which the example below computes rather than asserts.