How Do You Calculate the Break-Even Point When Refinancing?
Understand how long it will take for your monthly interest savings to cover the upfront costs of switching lenders.
The break-even point is the number of months it takes for your new, lower interest payments to cover the upfront fees associated with refinancing. Calculating this ensures that switching lenders is a genuinely profitable financial decision.
How the break-even calculation works
To find your break-even point, you divide your total switching costs (discharge fees, application fees, government registration fees) by your estimated monthly interest savings. The result is the number of months you must keep the new loan to justify the cost of moving.
Illustrative example
Illustrative example: You want to refinance to a lower rate that will save you $150 a month in interest. The total cost to exit your old lender and set up the new loan is $900.
$900 (costs) ÷ $150 (monthly savings) = 6 months.
After 6 months, you have broken even. From month 7 onwards, the $150 saving is pure financial benefit.
What may change the outcome
If you are on a fixed rate, your switching costs will include "break costs," which can be substantial. If your break costs are $4,000, your break-even point might be pushed out to two or three years. If you plan to sell the house before you reach that break-even point, refinancing is likely a bad idea.
Common misunderstandings
A common error is calculating savings based on the minimum monthly repayment rather than the actual interest charged. If you extend your loan term back to 30 years when you refinance, your monthly repayment drops significantly, but your actual interest savings might be zero.
When a personal review may help
A broker has software that accurately compares your current loan against proposed new loans, factoring in all fees and matching the loan terms, to provide a precise break-even calculation.
Next step
Use our Refinance Calculator to input your current loan details and see an instant estimate of your break-even timeframe.
This article provides general information only and does not take into account your objectives, financial situation or needs. It does not constitute personal credit, financial, tax or legal advice. Lending outcomes depend on individual circumstances, lender policy and assessment.
Have questions about your situation?
Every home loan scenario is unique. Speak directly with Cameron or Matthew to get clear answers.