Refinance break-even: when a lower rate still costs you money
Your refinance break-even point is how many months it takes for a lower rate to pay back your penalty and fees. Here's the formula, a worked Canadian example, a quick lookup table and the mistakes that make refinancing look better (or worse) than it is.
Your refinance break-even point is the number of months it takes for the interest you save at a lower rate to cover what it costs to switch. To find it, add up your prepayment penalty and fees, then divide by your monthly interest saving (not your payment drop). If you break even well before your current term would have ended, refinancing for rate can make sense; if not, waiting for renewal or a blend-and-extend may be better. In our illustration, a $400,000 mortgage moving from 5.19% to 4.29% breaks even in about 23 months with a three-months'-interest penalty, but doesn't break even within the 3 years left when an interest rate differential (IRD) penalty applies.
Key takeaways
- →Break-even months = total cost to switch ÷ monthly interest saving. It only pays if that's well inside the time left on your current term.
- →Use the interest saving, not the payment drop. A longer amortization can lower your payment without saving you much.
- →The penalty type decides most cases. Three months' interest is often recoverable; an IRD is designed to take back much of the saving.
- →Rule of thumb: every 1 point of rate saves about $83 a month per $100,000 owed, so $5,000 of costs takes about 15 months to recover on $400,000.
- →Rate isn't the only reason to refinance. Replacing high-interest debt or accessing equity changes the math.
Short answer: Your refinance break-even point is the number of months it takes for the interest you save with a lower rate to pay back the cost of switching. Add up your prepayment penalty and fees, divide by your monthly interest saving, and compare the result with the months left on your current term [1][2]. If you'd break even comfortably before your term ends, refinancing for rate can pay. If not, waiting for renewal or a blend-and-extend is often cheaper [2].
A lower rate isn't automatically a saving. If the penalty and fees take longer to recover than the months left on your term, or if you judge the deal by the drop in your monthly payment instead of the interest you save, a lower rate can still cost you money. This guide gives you the formula, a worked example, a quick lookup table and the most common mistakes. For the bigger decision of whether to refinance now or wait, see our refinance decision framework. To see how we can help, visit our mortgage refinancing page.
The refinance break-even formula
Break-even (months) = total cost to refinance ÷ monthly interest saved
1. Total cost to refinance. This includes:
- The prepayment penalty. It's usually the higher of three months' interest or the interest rate differential (IRD) [1]. Ask your lender for a written quote; federally regulated lenders have committed to give you your actual penalty on request [3].
- Fees. Possible costs include administration, appraisal, reinvestment and discharge fees, plus legal fees to register the new mortgage [2]. Some new lenders cover part of these [2]. Our guide to refinance costs in Canada breaks them down.
- Any cash back you have to repay, if your current mortgage came with a cash-back feature [2].
2. Monthly interest saved. A quick estimate is: balance × rate difference ÷ 12. On $400,000, a 0.9-point drop saves about $300 a month at first. The saving shrinks slightly as your balance falls.
3. Compare with your term. Count the months left until your current term ends. That's the window you know for certain; after that, you'd have been free to renew at market rates without a penalty anyway [1].
A worked example: same rate cut, two different penalties
Illustration: you owe $400,000 at 5.19% fixed, with 22 years of amortization and 36 months left on your term. A new five-year rate of 4.29% is available, and you keep the same 22-year amortization. Fees are assumed at $1,500.
| Penalty A: three months' interest | Penalty B: an IRD | |
|---|---|---|
| Penalty | about $5,190 | about $10,800 (simplified IRD) |
| Fees (assumed) | $1,500 | $1,500 |
| Total cost to switch | about $6,690 | about $12,300 |
| Interest saved over the 36 months left | about $10,400 | about $10,400 |
| Break-even | about 23 months | about 43 months, after the term ends |
| Net result over 36 months | about $3,700 ahead | about $1,900 behind |
Illustrative only, not an offer. Calculated in Python with semi-annual compounding. The simplified IRD is balance × rate gap × years left ($400,000 × 0.9% × 3); your lender's IRD may use posted rates and discounts and can be higher or lower [1].
What it shows: the same rate cut can pay or cost you, depending on the penalty. Three months' interest is a fixed cost that a big enough rate drop can beat. An IRD is calculated from the interest the lender loses over the rest of your term [1], so it tends to cancel out much of what you'd save. FCAC's own example shows the gap: on $200,000 at 6% with 36 months left and a 4% comparison rate, three months' interest is about $3,000 but the IRD is about $12,000 [1].
Want your real break-even number? A licensed 8Twelve agent can get your penalty, compare offers across 65+ lenders and show the months to break even, at no cost to you, OAC. Check your refinance options
Quick lookup: months to recover your costs
Use this to sense-check a refinance before you get quotes. It shows roughly how many months a $400,000 balance takes to recover different total costs at different rate drops.
| Rate drop | Interest saved per month (approx.) | Cost $3,000 | Cost $6,000 | Cost $10,000 | Cost $15,000 |
|---|---|---|---|---|---|
| 0.50 point | about $167 | 18 months | 36 months | 60 months | 90 months |
| 0.75 point | about $250 | 12 months | 24 months | 40 months | 60 months |
| 1.00 point | about $333 | 9 months | 18 months | 30 months | 45 months |
| 1.50 points | about $500 | 6 months | 12 months | 20 months | 30 months |
Simple estimate: balance × rate drop ÷ 12. Illustrative only. Scale it to your balance: every 1 point is about $83 a month per $100,000.
If the months in your row and column are close to (or more than) the time left on your term, refinancing just for rate probably won't pay.
Three mistakes that distort the break-even math
1. Using the payment drop instead of the interest saving. In our example, keeping the same 22-year amortization lowers the payment by only about $196 a month, even though you save about $289 a month in interest on average; the rest goes to paying down principal faster. Divide by $196 and break-even looks like 34 months, too pessimistic. Stretch the new mortgage back to 25 years and the payment drops about $364, which suggests break-even in 18 months, too optimistic: after 36 months you'd owe about $6,400 more than with the same amortization. Use the interest saving.
2. Forgetting fees and cash back. Appraisal, legal, discharge and any cash-back clawback all belong in the cost line [2].
3. Comparing past your term. After your current term ends, you'd have been free to renew without a penalty. Savings beyond that point aren't really created by refinancing now, and no one can reliably predict where rates will be by then. Keep the comparison to the time left on your term.
How to lower your break-even point
- Use your prepayment privileges first. A lump-sum prepayment before you break lowers the balance the penalty is based on, though some lenders restrict prepayments close to the date you break [1]. Our guide to mortgage prepayment privileges explains how they work.
- Ask about a blend-and-extend. Your lender blends your old rate with today's rate and you avoid the penalty, though fees may apply [2]. Compare it in our guide to blend-and-extend vs refinance.
- Ask the new lender to cover fees. Some lenders will pay part or all of the switching costs [2].
- Time it. Near the end of your term, penalties shrink and you can renew or switch without one [1].
Step by step: get your break-even number with a broker
- Request a written penalty quote from your current lender, with the date it's valid to [3].
- List every fee: appraisal, legal, discharge, administration and any cash-back repayment [2].
- Get comparable offers for the same amortization, so the comparison is fair. A broker can compare 65+ lenders from one application.
- Work out the monthly interest saving at each offer, using your balance and the rate difference.
- Divide cost by saving and compare the result with the months left on your term.
- Check the alternatives (blend-and-extend, HELOC, waiting for renewal) using the same math before you decide.
What about variable-rate mortgages? In our experience, many variable-rate contracts charge three months' interest rather than an IRD, which makes the cost easier to predict. The same formula applies, but remember that a variable rate can move during the term, so your saving isn't locked in. Our guide to fixed vs variable mortgages explains the trade-off.
When break-even isn't the whole story
Rate isn't the only reason to refinance. If you're replacing high-interest debt, the saving comes from that debt's rate, not your mortgage rate, and the break-even can be much shorter; see our debt consolidation mortgage guide. If you need cash for a renovation or family need, compare a refinance with a HELOC, which may avoid breaking your mortgage at all; our HELOC vs refinance comparison runs the numbers.
You'll also need to qualify for the new mortgage, and you can usually borrow up to 80% of your home's value [4]. Our mortgage refinance requirements guide covers the details.
From our desk: The question we ask first is "what's the penalty, in writing?" Most refinance-for-rate ideas are decided by that one number. If it's three months' interest and you have two or more years left, the math often works. If it's an IRD, we usually look at a blend-and-extend, a HELOC or simply planning ahead for renewal.
The refinance break-even point turns a big decision into one number: months to recover your costs. Get your penalty in writing, include every fee, divide by your monthly interest saving, and compare the result with the time left on your term.
Run the numbers: compare payments at different rates with our mortgage payment calculator, or read our complete mortgage refinance guide.
This article is for general information only and isn't financial, legal or tax advice. Rates, products and terms change without notice and are available on approved credit (OAC). The rate and terms you qualify for depend on your individual financial situation, including credit, income, property and loan-to-value. "Best rates" means the most suitable options available for your situation, not a guarantee of the lowest rate. Example rates and payments are for illustration only, as of October 2026, and are not an offer. 8Twelve Mortgage arranges mortgages through 65+ lenders and does not lend directly. Licensed across Canada — see our licences.
Example rates, penalties and savings are for illustration only, as of October 27, 2026, and are not an offer. Your actual rate and penalty depend on your lender, contract and situation, OAC. Rules checked against FCAC on October 27, 2026. 8Twelve does not lend or fund mortgages, including second or private mortgages; we arrange them with third-party lenders.
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Last reviewed on October 28, 2026