Is it worth refinancing your mortgage?
Switching mortgage has costs that you recover little by little through a lower payment. See how long it takes and whether it pays off over the years you will keep the home.
How to tell whether refinancing your mortgage pays off
Enter your outstanding balance, current rate and term, the new rate and term, the switching costs and how many years you will keep the mortgage. The calculator gives you the new payment, how long it takes to recover the costs and the real result of switching over that time, including the debt left at the end.
Example: with 150,000 over 20 years, going from 4% to 3% lowers the payment from 908.97 to 831.90, a saving of 77.07 a month. With 2,400 of costs, you recover them in 32 months. Over 5 years, switching leaves you 4,647 better off: 4,624 of payments saved and 2,423 less debt, minus the costs.
How it is calculated
- Simple break-even = switching costs ÷ monthly payment saving.
- Result over your time frame = payments you save − switching costs − extra debt left at the end (or + any debt reduction).
- Payments are for a fixed-payment loan on today's outstanding balance.
Assumptions
- Fixed rates in both options; if one is variable, try the average rate you expect.
- No recurring fees or tied products unless you add them to the costs.
- No discounting for the time value of money.
Frequently asked questions
How do you work out whether refinancing pays off?
First, divide the switching costs by the monthly payment saving: that is the break-even period. Then compare both options over the time you will keep the mortgage, adding the payments you save and the difference in the debt left.
What if I sell before recovering the costs?
It may not pay off. In the example, selling after 18 months you would save 1,387 in payments and owe 827 less, but with 2,400 of costs you would end up 185 worse off.
Why include the debt left at the end?
Because with a lower rate the debt falls faster, and that is your money too. And the other way round: if the payment falls because you extend the term, the debt falls more slowly.
Is lowering the payment by extending the term a saving?
Not necessarily. At the same 4%, going from 20 to 25 years cuts the payment by 117.22 a month, but after 5 years you are 3,138 worse off because of the costs and slower debt reduction. The calculator warns you when you extend the term.
What does switching mortgage cost?
Depending on the country and the type of switch: early repayment or arrangement fees, valuation, legal and registration costs. Ask the lenders for the details and add everything up.