Profitability Horizon: When Does Refinancing Actually Start to Pay?
Many borrowers focus exclusively on the break-even point — the moment they 'recover' exit costs. But the break-even is only half the story. The profitability horizon completes the picture by answering the most important question: how much will you actually save in total if you break your mortgage today? This comprehensive projection is what should guide your decision, because a short break-even with a small residual gain is not necessarily better than a longer break-even with significant gains afterward.
Understanding the Mechanics of Progressive Profitability
After reaching the break-even point, each additional month at the new lower rate generates net savings that add to your cumulative benefit. However, these savings are not perfectly linear. The mortgage balance decreases each month through principal payments, which progressively reduces interest savings. On an initial balance of $350,000 with monthly savings of $300 in the first month, savings at month 36 will be slightly lower — perhaps $275 — due to principal reduction. For a precise calculation, your AMF-certified mortgage broker in Quebec will use a comparative amortization schedule that projects both scenarios month by month.
- Profitability horizon
- The total period during which the borrower realizes net savings after covering all exit costs (penalty, notary, appraisal, discharge). Calculated by subtracting the number of months needed to reach break-even from the total number of months in the new mortgage term.
Projecting Total Savings: A Practical Method
- Calculate total exit cost: Add up the IRD penalty or 3 months' interest, notary fees ($1,000 - $2,000 in Quebec), appraisal fees ($300 - $500), discharge fees, and any other related costs. Obtain the total amount you will need to disburse to leave your current mortgage.
- Calculate average monthly savings: Compare amortization schedules for the old and new loans to obtain the monthly interest difference. Take an average over the new term duration to account for the progressive balance decrease.
- Déterminé the break-even point: Divide the total exit cost by the average monthly savings. The result is the number of months needed to reach equilibrium. Example: $8,500 / $350 = 24.3 months, rounded to 25 months.
- Calculate the profitability horizon and total gain: Subtract the break-even from the new term length. If the new term is 60 months and break-even is 25 months, the profitability horizon is 35 months. Multiply by average monthly savings: 35 x $350 = $12,250 in net savings over the term.
The Impact of Choosing the New Term Length
The choice of new mortgage term length has a major impact on the profitability horizon. A 5-year term offers a longer period to amortize exit costs and accumulate savings. A 3-year term, even with a sometimes slightly lower rate, compresses the profitability horizon and reduces total gain. For example, with a 24-month break-even, a 5-year term offers 36 months of net gains, while a 3-year term offers only 12 months. This factor is particularly important when the penalty is high — a longer term is often necessary to justify the exit cost.
Comparative Projections: When to Wait vs When to Break
The complete analysis should compare two scenarios: Scenario A where you break now and Scenario B where you wait for renewal. In Scenario B, you continue paying the old rate until the end of the term, then obtain a new rate at renewal without penalty. The difference in total cost between the two scenarios over the same period reveals the true advantage of breaking. If rates are stable, Scenario A is often more advantageous if the break-even is less than half the remaining term. If rates are declining, it may be wise to wait for an even better rate. Your mortgage broker in Quebec should present both scenarios side by side for an informed decision.