Refinance vs extra payments: the decision in numbers
Refinance vs extra payments: compare switching fees, monthly savings, remaining balances and break-even time before changing your mortgage contract. Use
Refinancing changes the contract; overpaying changes the balance
Refinancing replaces the existing loan with a new one. It can lower the rate or alter the term, but creates fees, underwriting risk and a new contract. An extra payment keeps the existing contract and immediately reduces principal. Compare the monthly saving after every switching cost with the guaranteed interest avoided by reducing principal. The difference between the advertised rates does not answer that question.
Break-even example
Suppose €180,000 remains for 20 years at 4.5%. The payment is about €1,138.77. A new 20-year loan at 3.7% would be about €1,062.60, saving roughly €76.17 monthly. If valuation, legal, broker and lender costs total €3,000, the simple break-even is about 40 months (€3,000 / €76.17, rounded up). If you expect to sell or refinance again in two years, the switch does not recover its upfront cost. At five years, gross payment savings are about €4,570 before unmodelled differences.
Keeping the old loan and paying the same €3,000 directly to principal produces interest savings immediately, with no wait for a break-even. Its exact benefit depends on timing and whether the lender shortens the term or recasts the payment.
Make the scenarios comparable
Keep the remaining term identical first. A refinance can manufacture a lower payment simply by restarting a longer term, while increasing total interest. Add every compulsory cost and any early-repayment compensation. Compare balances after the same date, not only payments. Then test a shorter holding period and, for a variable offer, a higher future rate.
Also compare flexibility: permitted overpayments, rate-reset clauses, insurance requirements and the consequences of missed payments. EU mortgage rules require pre-contractual information and generally provide early-repayment rights, but national law may allow compensation.
Practical decision
Refinancing is strongest when the verified monthly saving repays all costs well before your likely exit date and the new contract is not riskier. Extra payments are stronger when the current rate is acceptable, switching costs are high, or flexibility matters. They can be combined: refinance only if it clears a conservative break-even test, then overpay the new principal if the contract permits.
Use the refinance break-even calculator and extra-payment calculator. Treat the simple break-even as a screen, then confirm an amortisation comparison and written offers.
Do not ignore the balance at break-even
The simple fee-divided-by-saving calculation is useful but incomplete because the two loans amortise at different speeds. At month 40, compare the remaining principal under both schedules as well as accumulated payments. Add costs financed into the new loan to its opening balance; financing a €3,000 fee means paying interest on that fee too. Check whether the new rate is fixed through your expected holding period and whether compulsory insurance changes. Obtain a redemption statement for the existing loan on the proposed completion date. That turns estimates into comparable cash flows and prevents a modest headline-rate reduction from hiding a worse contract.