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Break-Even Calculation

Break-Even Calculation

Penalty3 min readFebruary 11, 2026
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The break-even calculation is the most important financial analysis any borrower should perform before breaking a mortgage in Canada. It involves determining the number of months needed for the interest savings generated by a new lower rate to offset all incurred costs: prepayment penalty, notary fees, appraisal fees, and other exit costs. The basic formula is straightforward: Break-even in months = Total exit costs / Monthly interest savings. For example, if breaking your mortgage costs $8,000 in penalty and fees, and the new rate saves you $400 per month in interest, your break-even point is 20 months. If you plan to stay in the property beyond this period, the transaction is profitable. However, the actual calculation is more nuanced. Monthly savings are not constant because the balance decreases, future rates are uncertain, and the remaining amortization may change. In Quebec, the AMF-certified mortgage broker is obligated to present this analysis to the client under the LDPSF. OSFI also requires financial institutions to provide tools for estimating penalties, facilitating this essential calculation for informed decision-making.

Break-Even Calculation: The Essential Tool Before Breaking Your Mortgage

Breaking a mortgage before the end of the term is a major financial decision that should never rely on instinct or informal advice from friends and family. The break-even calculation is the analytical tool that transforms this emotional decision into a rational, numbers-based one. Whether you are considering refinancing for a better rate, consolidating debts, or selling your property, the break-even point tells you precisely when the operation will start saving you money.

The Basic Formula Explained

Break-even point
The number of months needed for cumulative interest savings to offset all fees incurred to break and replace a mortgage. Once this threshold is reached, each additional month represents a net saving for the borrower.

The simplified formula is: Break-even in months = Total exit cost / Net monthly savings. The total exit cost includes the prepayment penalty (IRD or 3 months' interest), notary fees, appraisal fees, discharge fees, and any other related costs. The net monthly savings is the difference between the current interest payment and the interest payment at the new rate, calculated on the same balance.

Concrete Example for a Quebec Borrower

  1. Current situation: A $350,000 mortgage at a fixed rate of 5.50%, 5-year term with 36 months remaining. Monthly interest payment: approximately $1,604. The current lender is a major Canadian bank.
  2. New scenario: New fixed rate offered at 4.25% over 3 years. Monthly interest payment: approximately $1,240. Monthly savings: approximately $364 in pure interest.
  3. Exit costs: Estimated IRD penalty: $6,800. Notary fees: $1,500. Appraisal fees: $450. Discharge fees: $350. Total: $9,100.
  4. Break-even calculation: $9,100 / $364 per month = 25 months. Since the new term is 36 months, the borrower will save for 11 months after reaching break-even, representing approximately $4,004 in net savings.

Pitfalls of the Simplified Calculation

Many borrowers make the mistake of considering only the penalty in their calculation, overlooking ancillary fees that can represent an additional $2,000 to $3,000. Others forget that monthly savings are not constant — they decrease slightly each month as the principal balance is repaid. Finally, the calculation should ideally account for the fact that money used to pay the penalty could have been invested elsewhere (opportunity cost).

When Does the Break-Even Indicate It May Not Be Advisable to Break?

  • When the break-even exceeds the months remaining in your current term: you will not recover costs before the next renewal.
  • When the break-even exceeds your holding horizon: if you plan to sell in 18 months and the break-even is 24 months, breaking is not profitable.
  • When the rate difference is small (less than 0.50%): fixed costs (notary, appraisal) make refinancing uneconomical on small spreads.
  • When you are near the end of your term (6 months or less): waiting for renewal completely eliminates the penalty.

The Mortgage Broker's Role in Break-Even Analysis

In Quebec, the mortgage broker certified by the AMF under the LDPSF has a professional obligation to provide you with an objective analysis before recommending a refinance. This analysis must include the break-even calculation, an estimate of all penalties and fees, and a comparison between the refinancing scenario and waiting for renewal. The broker must also document this analysis in the client file. If your broker pushes you to refinance without having prepared this analysis, they are failing their regulatory obligations. Do not hesitate to request the numbers in writing before making your decision.

Frequently Asked Questions

How do I calculate my break-even point if I break my mortgage?
Add up all exit costs (penalty, notary, appraisal, discharge) to get the total cost. Calculate the monthly interest savings by comparing your current interest payment with the new rate. Divide the total cost by the monthly savings. The result is the number of months needed to make the operation profitable. If this number is less than the months remaining in your term, breaking is worthwhile.
Can my broker do this calculation for me?
Yes, and they should. Under the LDPSF in Quebec, the AMF-certified mortgage broker is obligated to fully inform you before recommending a refinance. Most brokers use specialized software that integrates all costs and produces a detailed break-even analysis including often-forgotten fees.
Does the break-even calculation account for taxes?
The basic calculation generally does not account for tax implications. However, if your mortgage is on a rental property, mortgage interest is tax-deductible in Canada. A rate change therefore also modifies your tax deduction, which can affect the true break-even point. Consult an accountant for situations involving income properties.
What if my break-even point exceeds my remaining term?
If the break-even exceeds the number of months remaining in your current term, breaking is generally not profitable. It is then preferable to wait for renewal to change rates or lenders without penalty. Your broker could also explore alternatives such as blend-and-extend or portability.
Does the break-even change if I make a lump-sum payment before breaking?
Yes. Making a lump-sum payment (using your prepayment privilege) before breaking reduces the balance on which the penalty is calculated, which lowers the total exit cost and shortens the break-even point. This strategy is particularly effective with IRD-type penalties on fixed rates.

Educational information only. This does not constitute financial advice under the Act Respecting the Distribution of Financial Products and Services (LDPSF). Consult an AMF-certified mortgage broker before making any financial decision.

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