Refinancing Is One Division Problem
Every refinancing decision reduces to a single calculation: how many months of lower payments it takes to recover what the switch costs. Below that number of months you lose money; beyond it you gain.
break-even months = total switching costs ÷ monthly saving
If moving lenders costs $3,000 and cuts your payment by $200, you break even at fifteen months. Staying two years makes it worthwhile; selling in twelve makes it a $600 mistake. Everything else in this page exists to get those two inputs right.
Getting the Costs Right
The monthly saving is easy to see and the costs are easy to underestimate, which biases the decision toward switching. The usual components:
| Cost | Who charges it | Notes |
|---|---|---|
| Discharge or exit fee | Existing lender | For releasing the mortgage. |
| Break cost | Existing lender | Only on a fixed rate broken early. Can be very large. |
| Application or establishment fee | New lender | Sometimes waived as an incentive. |
| Valuation | New lender | Often absorbed, sometimes not. |
| Legal and registration | Government and conveyancer | Registering the change of lender. |
| Mortgage insurance | New lender | Applies again if the new loan exceeds 80% of value. |
The break cost on a fixed rate is the one that turns a good deal bad. It is not a penalty in the punitive sense, it compensates the lender for the interest it no longer receives, but it can run to thousands and is calculated from prevailing rates on the day, so it cannot be known precisely in advance. Ask for a written figure before committing to anything.
The Trap in the Monthly Saving
A lower payment is not automatically a saving. Refinancing usually resets the loan to a fresh term, and that alone reduces the payment without reducing what you owe.
Someone twelve years into a 25-year mortgage has thirteen years left. Refinancing to a new 25-year term drops the monthly payment substantially, and adds twelve years of interest. The payment fell; the total cost rose. The comparison that matters is not old payment against new payment but total remaining interest under each option.
The fix is straightforward: refinance to the remaining term rather than a fresh one, or take the new longer term and keep paying the old amount. Both capture the rate improvement without giving back the years you have already paid down.
When It Is Worth Looking
Three situations make refinancing worth pricing rather than assuming:
- Rates have fallen since you borrowed. The old rule of thumb was a full percentage point, but that predates cheap switching, run the break-even instead of applying a rule.
- Your equity has grown past 80%. Crossing that line removes mortgage insurance from the new loan and often unlocks a better rate tier at the same time. This is the most commonly missed trigger, because it can happen through price growth alone without you doing anything.
- A fixed term is ending. Rolling onto a lender's standard variable rate is usually the most expensive option available, and it happens automatically if you do nothing.
Fixed or Variable on the New Loan
Fixing buys certainty and costs flexibility: the payment is known, but breaking early triggers the break cost described above. Variable does the opposite, it moves with the market and can usually be repaid early without charge.
The honest answer depends on things you know better than any calculator: how tight your budget is against a two-point rise, and how likely you are to sell or move within the fixed period. A split loan, part fixed and part variable, is a common compromise rather than an indecisive one.
This page is general information and not financial advice. Break costs, insurance rules and fee structures vary by lender and country; get the specific figures in writing before deciding.