The Break-Even Calculation: Your 3-Minute Guide

The mortgage break-even calculation is the most important analysis to perform before deciding to break your mortgage in Quebec. This calculation tells you exactly how long it will take for the savings achieved through a better rate to offset all costs associated with breaking your contract. A favourable break-even means you will recover your investment well before the end of your new term, while an unfavourable break-even suggests that patience is the optimal strategy. Contrary to what many believe, this calculation is not complex and can be performed with information readily available from your current lender and an AMF-certified mortgage broker.

1. Step 1: Identify your breakage costs: Add up all costs associated with breaking your mortgage. The breakage penalty is the largest component: for a variable rate, it is generally three months' interest on your current balance; for a fixed rate, it is the higher of three months' interest and the interest rate differential (IRD). Add the legal fees for the new mortgage ($1,200 to $2,500), the property appraisal fees ($350 to $500), and the discharge fees for the current mortgage ($250 to $350). The total of these fees constitutes your total breakage cost.
2. Step 2: Calculate your monthly savings: Compare your current monthly payment to the payment you would have with the new rate, keeping the same remaining amortization. For example, on a balance of $380,000 with 22 years remaining amortization, a current rate of 5.75% gives a payment of approximately $2,385 per month. With a new rate of 4.50%, the payment would be approximately $2,155, saving $230 per month. Ensure you compare identical amortizations for an accurate calculation.
3. Step 3: Divide and interpret: Divide the total breakage cost by the monthly savings. If costs are $8,500 and monthly savings are $230, the break-even is 37 months (approximately 3 years). Compare this result to the number of months in your new term: if you take a 5-year term (60 months), you will benefit from 23 months of net savings after the break-even point, totalling approximately $5,290. This amount represents your actual net gain.

Break-Even Decision Zones

The interpretation of the break-even result is not binary — there are decision zones that consider both financial return and the associated risk level. A break-even under 18 months is considered strongly favourable: savings are realized quickly and the risk of changing circumstances is minimal. A break-even between 18 and 30 months is moderately favourable: the break is profitable, but the advantage is more modest and assumes some stability in your situation. A break-even between 30 and 42 months is in the grey zone: the advantage exists but is marginal and vulnerable to rate changes or personal circumstances. Beyond 42 months, breaking is generally not recommended as the risk exceeds anticipated savings.

Factors That Modify the Actual Break-Even

Several factors can modify your calculated break-even in either direction. First, new lender incentives — cash back, legal fee coverage, or transfer programs — can significantly reduce your net breakage costs. Some lenders offer up to $3,000 cash back to attract refinancing clients, which could reduce your break-even by 10 to 15 months. Second, the ability to consolidate high-interest debt into the new mortgage increases your total monthly savings well beyond the simple mortgage rate difference. Third, the tax impact — mortgage interest on a rental property is tax-deductible — can modify the net calculation for real estate investors.

Calculation Examples Under Different Scenarios

• Favourable scenario: $300,000 balance, current variable rate at 6.0%, new fixed rate at 4.5%. 3-month interest penalty = $4,500. Total costs = $6,800. Monthly savings = $285. Break-even = 24 months. Net gain over a 5-year term = $10,460.
• Moderate scenario: $400,000 balance, current fixed rate at 5.5%, new fixed rate at 4.5%, 30 months remaining. IRD penalty = $13,000. Total costs = $15,500. Monthly savings = $280. Break-even = 55 months. Not profitable within the remaining term.
• Consolidation scenario: $350,000 mortgage balance + $40,000 high-interest debt. Penalty = $5,200 (variable rate). Total costs = $7,500. Mortgage + consolidation savings = $620 per month. Break-even = 12 months. Net gain over 5 years = $29,700.

Mortgage break-even point

The mortgage break-even point is the exact number of months required for the monthly savings resulting from refinancing at a lower rate to fully offset all costs of breaking the initial mortgage contract, including the penalty, legal fees, appraisal fees, and discharge fees. Beyond the break-even point, each additional month generates a net gain for the borrower.