Total Costs vs Savings: Complete Refinancing Balance Sheet

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Complete Balance Sheet: Total Costs vs Savings of Refinancing

Mortgage refinancing can be a very advantageous financial decision, but only if the savings achieved exceed all costs incurred. Too many borrowers focus solely on the new interest rate without considering the complete picture. This guide presents a rigorous analytical framework for evaluating the true profitability of a refinancing in Quebec.

Refinancing Cost Table

Mortgage break penalty: the most variable and often the most significant cost. For a fixed rate, it is the higher of three months' interest or the interest rate differential (IRD). For a variable rate, it is almost always three months' interest. Typical range: $1,500 to $25,000.
Notary fees: for preparing the mortgage deed, cancelling the former mortgage, and publishing at the land registry. Typical range: $700 to $1,500.
Property appraisal fees: required by the lender to confirm current market value. Typical range: $300 to $500. Some lenders use free automated valuations.
Discharge and cancellation fees: removal of the former mortgage from the land registry. Typical range: $250 to $600. Higher for collateral mortgages.
Title insurance: one-time premium required by many lenders. Typical range: $250 to $500.
Lender administrative fees: application, setup, or processing fees. Typical range: $0 to $500.

Calculating Potential Savings

Refinancing savings come primarily from the interest rate reduction. To quantify these savings, multiply the difference in monthly payments by the number of months remaining in the new term. Do not forget to consider the impact on total amortization: a refinancing can extend the amortization period, generating additional interest over the long term even if the monthly payment is lower.

Break-Even Analysis

Step 1: Calculate total cost: Add up all costs listed above: penalty + notary + appraisal + discharge + title + administrative fees. For example: $6,500 (penalty) + $1,200 (notary) + $400 (appraisal) + $450 (discharge) + $350 (title) = $8,900.
Step 2: Calculate monthly savings: Compare the current monthly payment to the projected payment with the new rate. For example: former payment of $2,100 vs new payment of $1,875 = savings of $225 per month.
Step 3: Calculate the break-even point: Divide total cost by monthly savings. Example: $8,900 / $225 = 39.6 months, or approximately 3 years and 4 months before the refinancing becomes profitable.
Step 4: Compare with your horizon: If you plan to stay in your property well beyond the break-even point, the refinancing is financially justified. If you expect to move before then, it is probably better to wait for renewal.

Often-Forgotten Factors in the Calculation

Several factors are frequently omitted from refinancing analysis. Extending the amortization generates significant additional interest over the life of the loan. Capitalizing fees into the new loan increases the balance on which interest is calculated. The opportunity cost of funds used to pay the penalty (if paid in cash) must also be considered. Finally, the tax impact may be relevant if the refinancing is used to invest in a rental property, since mortgage interest on an income property is tax-deductible in Quebec and federally under CRA and Revenu Quebec rules.

Frequently Asked Questions

What are all the costs to include in a refinancing calculation?

Costs to include are: the mortgage break penalty (the most significant cost), notary fees ($700 to $1,500), appraisal fees ($300 to $500), discharge/cancellation fees ($250 to $600), title insurance ($250 to $500), the CMHC premium if applicable (2.80% to 4.00% of the borrowed amount), and any lender administrative fees. The total can easily exceed $5,000 to $15,000.

How do I calculate the break-even point of a refinancing?

Divide the total refinancing costs by the monthly savings achieved through the new rate. For example, if your total costs are $8,000 and you save $200 per month, your break-even is 40 months (3 years and 4 months). If you plan to move before that date, the refinancing is probably not worthwhile.

Can the break penalty be added to the new loan?

Yes, in most cases, the penalty and refinancing fees can be capitalized (added to the new mortgage balance), provided the loan-to-value ratio does not exceed 80% for a conventional refinancing. Caution: capitalizing these costs means you will pay interest on them for the entire loan duration.

Can a mortgage broker help me with this analysis?

Absolutely. An AMF-certified mortgage broker has a professional obligation to perform this complete analysis before recommending a refinancing. They have specialized calculation tools and can obtain penalty estimates from multiple lenders to compare scenarios. This service is generally free of charge for the borrower.

When is a refinancing not worthwhile?

A refinancing is generally not worthwhile when: the break penalty is very high (many months remaining on the term with a fixed rate), the rate differential is small (less than 0.50%), the mortgage balance is small (minimal monthly savings), or you plan to sell the property within the next 2-3 years.

Do I need to include the CMHC premium if my refinancing exceeds 80%?

Refinancings in Canada are capped at 80% loan-to-value by OSFI rules (Guideline B-20). Beyond this threshold, refinancing is not permitted as a conventional loan. However, if your current loan is insured and the refinancing maintains the insurance, CMHC conditions apply. Consult your AMF broker for détails specific to your situation.