The break-even on a refinance is the total cost of doing it divided by the monthly saving. Three thousand of fees against a saving of 150 a month breaks even at month twenty — so the lower rate is only worth having if you keep the loan longer than that. Move in month fifteen and the refinance cost you 750.
That one division settles most of the decision, and it is the calculation the headline rate comparison leaves out entirely.
What goes into the fee side?
More than the arrangement fee, and the list varies by jurisdiction.
| Cost | Typical shape |
|---|---|
| Arrangement or origination fee | Flat, or a percentage of the loan |
| Valuation | Flat, sometimes waived |
| Legal or conveyancing | Flat, sometimes bundled |
| Early repayment charge on the old loan | Percentage of the balance |
| Broker fee | Flat or percentage |
The early repayment charge is the one that most often kills a refinance that otherwise looks obvious. On a fixed deal it is frequently a percentage of the outstanding balance, and on a large balance early in the term that can exceed several years of savings.
Fees added to the loan rather than paid upfront are still fees. They come with interest attached, which lengthens the break-even rather than removing it.
Why is the monthly saving not the whole benefit?
Because a refinance usually resets the term, and a reset term reallocates the payment toward interest again. Refinancing a 30-year loan after five years into another 30-year loan means paying interest on the early, interest-heavy part of the schedule twice.
The amortisation note shows why: the front of a schedule is where the interest lives. A lower rate over a longer remaining term can produce a smaller monthly payment and a larger total cost, which is a genuinely worse outcome dressed as a saving.
The clean comparison is total interest remaining, not the monthly figure — and refinancing into a shorter remaining term is where the arithmetic is unambiguously good.
What rate difference is worth it?
It depends entirely on the balance, which is why rule-of-thumb answers like "one per cent" are unhelpful. One per cent on a 400,000 balance is worth roughly four times what it is worth on 100,000, against fees that are often similar in size.
The useful framing is the break-even month rather than the rate gap. A quarter-point saving on a large balance with low fees can break even in months; a full point on a small balance with high fees may never break even before the term ends.
Does the same logic apply to overpaying?
The comparison is different and the arithmetic is related. Overpaying a mortgage earns a guaranteed, tax-free return equal to the mortgage rate, because every unit of principal removed avoids all the interest it would have generated.
That makes the comparison against investing straightforward in principle: overpay when the mortgage rate exceeds the after-tax return you would otherwise get with the same certainty. The word doing the work is certainty — a guaranteed 5 per cent and a hoped-for 7 per cent are not the same offer.
Two practical caveats. Overpayment allowances are often capped at 10 per cent of the balance a year on a fixed deal, and money paid into a mortgage is hard to get back out, which is why the emergency fund generally comes first.
The tax position changes the comparison in several countries and it is worth checking rather than assuming. Where mortgage interest is deductible, the effective rate is lower than the headline and overpaying is correspondingly less attractive; where investment returns are taxed and the mortgage is not deductible, the balance tips the other way.
When is a fixed rate worth the premium?
When the certainty is worth more than the expected saving, which is a budgeting question rather than a forecasting one. A fixed rate is usually priced above the variable one, and the difference is what the lender charges for taking the risk.
The honest test: if the payment rose by two percentage points tomorrow, would that be uncomfortable or unmanageable? Uncomfortable is a case for variable and a buffer; unmanageable is a case for fixing regardless of what rates are expected to do.
Questions people ask
Should I refinance to consolidate debt? It moves expensive short-term debt onto a cheap long-term loan, which lowers the payment and can raise the total paid substantially — twenty-five years of interest on a sofa. It also converts unsecured debt into debt secured on the house.
Do fees roll into the loan for free? No. Rolled fees accrue interest for the remaining term, so a 3,000 fee added to a 25-year mortgage costs considerably more than 3,000.
How do I compare two offers properly? By APR at equal terms first, then by total interest remaining over the period you expect to hold it. The APR article covers why the rate alone is not enough.
Does a product transfer avoid the fees? Often most of them, because the lender does not need new legal work or a full valuation. It is the cheapest form of refinance and it only offers that lender’s range.
One division gives the break-even month; everything else is a question about how long you will stay. The mortgage calculator and loan calculator show what a rate change does to the payment, the monthly payment calculator compares terms directly, and the APR calculator folds the fees back in.