Reference

Refinance: when the math really works.

A 1% lower rate is the headline. The full math involves prepayment penalties, new origination costs, the residual term you're locking into, and whether you're resetting the amortisation clock. All four numbers matter.

The naive calculation

Most online refinance calculators ask three things: current rate, new rate, current balance. They report monthly savings and a break-even period in months. The calculation is correct as far as it goes; it is also dangerously incomplete because it ignores three meaningful costs:

The prepayment penalty on the existing loan (often 3 months' interest or an Interest Rate Differential, whichever is greater).
The new origination costs on the refinanced loan (legal fees, registration fees, lender's appraisal, broker compensation).
The amortisation reset. A 25-year refinance from a loan with 12 years left is not the same product as the original; it doubles the remaining repayment horizon.

The full calculation

The right comparison is the total interest paid over the same horizon under both scenarios:

Status quo. Total interest paid from today through the end of the existing loan term.
Refinance. Penalty + new origination costs + total interest paid on the refinance from today through whatever final maturity you choose.

Hold the maturity date constant across the two scenarios. If the existing loan has 12 years left, the refinance must also be set to 12 years — not 25 — for the comparison to be apples-to-apples.

Worked example: $250k balance, 12 years left

Borrower has a $250,000 balance with 12 years remaining at 5.95% (originally a 25-year loan, 13 years in). Current monthly payment: $1,594. Lender offers a refinance at 4.5%.

Status quo. 144 more monthly payments of $1,594 = $229,536. Total interest paid from today: $229,536 − $250,000 = (negative, because principal repayment is the dominant component) — actually, the remaining interest is approximately $79,500.
Refinance to 12-year term at 4.5%. New monthly payment: $2,287. Total payments: $329,328. Total interest: $79,328. Plus penalty (~$8,000) and origination ($2,000). All-in cost: $339,328.
Naive comparison: the new monthly payment is higher; the headline says “refinance is more expensive.” That's wrong; we're amortising the same balance over the same horizon at a lower rate, so the interest must be lower — but the gross savings of ~$170 are eaten by penalty and origination, leaving roughly $7,500 of net benefit before considering opportunity cost.

The amortisation-reset trap

The most common mistake in refinance decisions: resetting the amortisation clock. A 25-year refinance of a 12-years-remaining loan reduces the monthly payment substantially — this looks like savings but is mostly a longer payback period, not a lower total interest charge. On the example above, refinancing to a fresh 25-year term at 4.5% gives a $1,389 monthly payment (lower than the $1,594 status quo) but pays $166,700 of total interest vs. the $79,500 remaining on the status quo. The refinance more than doubles the lifetime interest. The lower monthly payment hides a much higher total cost.

The four numbers you need

Rate reduction. The contracted rate of the existing loan minus the contracted rate of the refinance. For the calculation to clear penalties and costs, this typically needs to be ≥ 0.50 %.
Prepayment penalty. Get the figure in writing from your existing lender. Canadian lenders use Interest Rate Differential (IRD) on fixed-rate loans, which depends on a spread between contracted and posted rates that varies by lender; the figure can range from 1 to 6 months' interest.
New origination costs. Legal fees ($800–$1,500), registration ($150–$300), appraisal ($300–$500), title insurance ($250–$400), and any broker compensation. Some lenders absorb origination on refinances above a minimum balance.
Residual term you're locking into. Match the existing remaining term unless you have a deliberate reason to extend.

Break-even calculation

Total cost of refinancing (penalty + origination) divided by the monthly interest saving gives the months until break-even. If you plan to hold the property through the break-even date, the refinance pays back. If not, it does not. Most reputable Canadian sources use a 24-month break-even threshold as the rule of thumb — below that, the refinance is clearly worthwhile; above 36 months, clearly not; in the 24–36 month range, it depends on personal circumstances.