Refinancing replaces your mortgage mid-term: you pay a penalty to break the old contract, pay fees to register the new one, and reset to a lower rate. The whole question is whether the savings outrun the costs before your circumstances change again. The break-even formula is simple — total costs divided by monthly savings — but the inputs deserve care, because the penalty is the part most borrowers underestimate.
The penalty: the biggest cost
Breaking a closed mortgage triggers a prepayment penalty, and the type of mortgage decides how it's calculated:
- Closed fixed-rate: the greater of three months' interest or the interest rate differential (IRD).
- Closed variable-rate: usually just three months' interest — no IRD, which is why variable mortgages are much cheaper to break.
The IRD compensates the lender for interest it expected to earn. A simplified version is (your rate − the lender's current rate for your remaining term) × balance × years remaining. As an illustration: a $400,000 balance at 5.44% with 3 years left, against a current 3-year rate of 4.04%, gives a simplified IRD of about $16,800. Real lender calculations vary — big banks often use posted rates in the IRD math, which typically raises the penalty — and broker sources cite fixed-rate IRD penalties commonly running $5,000–$20,000+ when rates have fallen. Your lender's formal quote is the only exact figure.
The other fees: appraisal, legal, discharge
The penalty gets the headlines, but refinancing stacks smaller costs that commonly total a few thousand dollars:
| Fee | Typical range |
|---|---|
| Appraisal | $300–$600 |
| Legal / notary | $700–$1,200 |
| Discharge fee (old lender) | $200–$400 |
The discharge fee is sometimes waived if you stay with the same lender — one of several reasons to get a quote from your current lender before shopping. Also note the hard rule: a refinance in Canada is capped at 80% of the home's current appraised value, so the new balance can't exceed that line.
The break-even formula
The result is the number of months before refinancing pays off. If you'd sell, move, or renew before that month, refinancing loses money.
Worked example: $420,000, 5.44% → 4.34%
A borrower owes $420,000 with 22 years remaining at 5.44% and can refinance to 4.34% over a fresh 25-year amortization:
- Old payment: about $2,716.96/month.
- New payment: about $2,287.37/month.
- Monthly savings: about $429.58.
- Total costs: say $9,000 (penalty plus fees — check your lender's quote).
- Break-even: $9,000 ÷ $429.58 ≈ 21 months.
So this refinance pays off only if the borrower stays put — and keeps the mortgage — for at least 21 months past the refinance date. It also restarts a 25-year amortization, so part of the "savings" comes from stretching repayment rather than from the rate alone; compare total interest, not just the monthly payment.
The renewal shortcut: at the end of your term, you can switch lenders and negotiate a new rate with no prepayment penalty. If renewal is within a year and the break-even stretches beyond it, waiting usually wins.
When refinancing makes sense — and when it doesn't
- Makes sense: the break-even point falls well inside your remaining term, you'll stay in the home past it, and the rate gap is wide enough to matter.
- Makes sense: consolidating high-interest debt (a common reason) — but only if the new monthly outflow, including the bigger mortgage, actually fits the budget.
- Doesn't: the break-even lands near or past your renewal date — just wait.
- Doesn't: you might sell or move within the break-even window; the penalty was paid for savings you'll never collect.
- Watch the amortization reset: refinancing into a fresh 25 years lowers the payment partly by adding years of interest — model lifetime interest, not just the monthly number.
Frequently asked questions
How is a mortgage refinance penalty calculated in Canada?
Closed fixed-rate mortgages charge the greater of three months' interest or the IRD; closed variable-rate mortgages usually charge just three months' interest. Fixed-rate IRD penalties commonly run $5,000–$20,000+ when rates have fallen.
What is the interest rate differential (IRD)?
It's the lender's compensation for lost interest, roughly (your rate − current rate for your remaining term) × balance × years remaining. For example, $400,000 at 5.44% with 3 years left against a 4.04% current rate gives a simplified IRD near $16,800. Lenders' actual calculations vary.
What does it cost to refinance a mortgage in Canada?
Common ranges: appraisal $300–$600, legal/notary $700–$1,200, discharge fee $200–$400 (sometimes waived by your current lender) — on top of the prepayment penalty. Your formal quote governs.
How do I calculate my refinance break-even point?
Divide total refinance costs by monthly payment savings. For example, $9,000 in costs ÷ $429.58 in monthly savings ≈ 21 months to break even.
Should I wait until renewal to refinance?
Often yes — at term end you can switch lenders with no prepayment penalty. If renewal is close and the break-even extends past it, waiting usually wins.
Sources and methodology
- Arthur Zhao: refinancing in Ontario — 80% cap, penalty types and fee ranges
- kraftmortgages: 2026 refinance guide — penalty calculation and IRD ranges
- kraftmortgages: 2026 mortgage penalty calculation (fixed vs. variable)
- calgary.com: how the IRD penalty works
- Justin Havre: refinancing costs — penalty, legal, appraisal, discharge
This article provides general information, not financial advice. Penalty and fee ranges are common market figures for illustration; your lender's contract and formal quote determine actual amounts. Payment examples use Canadian semi-annual compounding.