Remortgaging: The Payment, the Fees and the Break-Even Month

Two documents, and the dates on them do not line up

The offer is for a five-year fix at 4.29 per cent with a £1,495 arrangement fee. The mortgage it would replace has four months and eleven days left of a two-year fix at 2.19 per cent, £212,000 outstanding, nineteen years still to run. Both pieces of paper have expiry dates. The offer's is a lender's administrative window; the fix's is the day an early repayment charge stops applying and the loan drops to the reversion rate. Nothing about this is a judgement call until those two dates are written next to each other, and then the whole thing becomes a scheduling problem with a fee attached.

The trap in the middle is a word. Three different numbers on this loan are all called the rate: the 2.19 per cent that is ending, the 7.49 per cent reversion rate that takes over if nobody does anything, and the 4.29 per cent on the offer. Every published account of remortgaging quietly compares the third against the second, produces a saving of several hundred pounds a month, divides the fee by it and reports a break-even in weeks. That arithmetic is correct and the answer is meaningless, because sitting on the reversion rate was never one of the options being weighed. It is the thing that happens if the post goes unopened.

So the useful question is narrower than "should I remortgage", and it has a number for an answer: given the deal I could have for no fee at all, in which month does this fee-paying deal overtake it — and does that month arrive before the fixed period ends? Everything below is the work of getting an honest numerator and an honest denominator into that fraction.

The baseline is whatever you would do if you paid nobody

A break-even month measures one deal against another, and the other has to be a deal you would genuinely take. For most people four months from a reversion date that is the existing lender's product transfer: a rate switch on the same loan, same lender, same security, no valuation, no conveyancing, and in the ordinary like-for-like case no fresh affordability assessment. The FCA's responsible lending rules in MCOB 11 do not require a fresh affordability assessment where an existing lender is varying the rate on a loan it already holds and the borrower is taking on no additional debt, which is why a product transfer can be executed in an afternoon while a move to a new lender is a full application.

Set the product transfer as the baseline and the offer's arithmetic changes character completely. Against 4.44 per cent, the 4.29 per cent deal saves £16.88 a month. Divide £1,495 by that and the break-even lands at 88.6 months — seven years and four months, on a fixed period that lasts five. The offer that looked like an obvious yes against the reversion rate is, against the deal available for nothing, a fee that does not repay itself inside the product it is attached to.

Change one input and it flips. If the existing lender had come back at 4.64 rather than 4.44, the saving would be £39.57 a month and the break-even 37.8 months — comfortably inside a five-year fix, hopeless inside a two-year one. Twenty basis points on the baseline moved the answer from no to yes without anything about the offer changing at all. That sensitivity is the reason to get the product transfer quote in writing before running any of this, and the reason a break-even month quoted without naming its baseline is not a number.

The switching cost, read off the paperwork rather than remembered

Every item that would not be paid if you stayed put belongs in the numerator, and the list is longer than the arrangement fee. Some lines are on the new lender's illustration, some are on the outgoing lender's tariff of charges, and the one that decides most early switches — the early repayment charge — is in the original offer, usually as a table of percentages stepping down by year. In the UK, MCOB 12 requires that charge to be a reasonable pre-estimate of the cost to the lender of the early repayment, which is a rule about how it is set, not a promise that it is small.

On this loan it is 3 per cent while the fix runs: £6,360. Against a £16.88 monthly saving that is a break-even measured in centuries, and against the largest honest saving on the table it is still 161 months. That is the arithmetic behind the plain advice to wait for the reversion date rather than jump early, and it is also why the four-month gap is not dead time — it is the period during which the switch is being arranged for a completion date that falls on the far side of the charge.

Two lines get forgotten with some regularity. The first is the exit or deeds release fee the outgoing lender charges on redemption whether or not any early repayment charge applies; it is small, it is in the tariff of charges, and it is a fee for leaving that survives the end of the fixed period. The second is a broker fee, where one applies — worth establishing early whether the broker is paid by lender commission, by you, or by both, and whether anything is refundable if the application fails at valuation.

The balance below which an arrangement fee cannot pay for itself

The choice between a fee-paying low rate and a fee-free higher one is not a matter of taste, and it is not answered by the rate. A fee is a fixed sum; the saving it buys is a percentage of a balance. So the same pair of products — here 4.29 per cent with £1,495 against 4.64 per cent with nothing — gives a completely different verdict depending on how much is owed, and the crossover can be computed exactly rather than argued about.

At £212,000 the fee is repaid in month 38 and the five years net £879. At £133,500 the break-even lands precisely on the last month of a five-year fix, which is another way of saying the fee buys nothing. Below that, the fee-paying product is simply the more expensive one for this borrower, however much better its rate looks in an advertisement. And if the fixed period is two years rather than five, the balance has to reach roughly £334,000 before the same fee clears. A rule of thumb that ignores the balance and the fixed period is a rule of thumb that is wrong on both sides of a wide range.

What a payment comparison hides in both directions

A lower rate on the same term does two things, and the monthly payment only reports one of them. It reduces the cash leaving the account, and it also shifts the split inside every payment towards principal. Over the first sixty months the 4.29 per cent deal repays £40,297.79 of capital against £39,157.46 on the fee-free 4.64 — £1,140.33 more equity, on top of the £879 of cash. Compare the honest totals instead of the payments and the five-year gap is £2,019, not £879, and the point at which the fee is genuinely repaid moves forward from month 38 to month 25.

Run the same correction on the earlier comparison and the picture stops being a verdict. Against the 4.44 per cent product transfer, the offer's cash break-even was 88.6 months, well past the end of the fix. Include the extra capital repaid and it arrives at month 60 — the last month of the fixed period, with a net of nine pounds. Five years of paperwork to be nine pounds ahead is not a decision to agonise over, and knowing that is worth more than a false precision in either direction.

The correction in the other direction is the fee added to the loan. £1,495 rolled into this mortgage raises the payment by £9.60 and is repaid over nineteen years, costing £2,188.68 in total — £693.68 of interest on a fee of £1,495. That is not an argument against doing it if the cash is not there. It is an argument for putting £2,188.68 rather than £1,495 into the numerator when it is, and for noting that the fee stays on the balance long after the five-year product it paid for has expired.

Four months, in the order the paperwork moves

The sequence matters more than the diligence. A remortgage to a new lender is a new mortgage — application, credit search, valuation, legal work, redemption of the old loan — and each stage has a queue in front of it. Lenders commonly allow a new deal to be secured some months ahead of the reversion date and issue offers with a stated validity period, but both windows are lender-specific and both are printed on the documents rather than fixed by rule. Read the two dates off the paperwork and work backwards from the reversion date; do not assume either.

One instruction is worth stating separately because it is where the money actually leaks: give the solicitor a completion date, not a month. The target is the first day the early repayment charge no longer applies, which is a date printed in the original offer. Complete one day early and the numerator gains £6,360. Complete one month late and the reversion rate takes £384.50 for the privilege.

1. Ask the existing lender for the product transfer rates available on the loan, in writing, and treat the best of them as the baseline for everything else. It costs nothing and it is the number the entire decision divides by.
2. Read the reversion date and the early repayment charge table off the original mortgage offer, and confirm the exit or deeds release fee from the current tariff of charges.
3. Get a current valuation view before applying anywhere — an estate agent's appraisal and recent sold prices, not a portal estimate — and work out which loan-to-value band the balance falls into on that figure.
4. Where the balance sits just above a band edge, price the overpayment that would cross it against the existing deal's annual overpayment allowance, and make it before the application rather than after.
5. Apply early enough that the offer is issued with weeks in hand, and put every fee from the offer and the tariff into the break-even calculation before accepting anything.
6. Instruct the conveyancer with the completion date written down — the first day after the fixed period ends — and confirm the redemption statement matches the balance the new lender is advancing.
7. If the valuation comes back low, stop and re-run the arithmetic against the product transfer rather than negotiating with the new lender's underwriter. The baseline has not moved and it may now be the better deal.

The valuation is the part you do not control

Pricing is set by loan-to-value band, and the band is decided by someone else's opinion of the property on a day you do not choose. At £212,000 against a £280,000 valuation the loan sits at 75.71 per cent — above the 75 per cent line by seven-tenths of a percentage point, which on this balance is £2,000. An overpayment of £2,000 made before the application, inside the existing deal's annual allowance, lands the loan at exactly 75.00 per cent. Whether that is worth doing depends on the step in pricing between the two bands, which is commercial pricing rather than a published table; ask the lender what its own rates are on each side and treat any figure quoted elsewhere as somebody's guess.

The risk runs the other way with more force. A cautious desktop valuation at £258,000 puts the same loan at 82.17 per cent, across the 80 per cent line, and the rate on the offer is withdrawn in favour of whatever the higher band pays. Nothing about the borrower has changed. This is the most common way a remortgage that was going to save money quietly stops doing so, and it is the reason the product transfer baseline should stay live until completion — an existing lender is switching a rate on a loan it already holds, and does not always require a fresh valuation to do it.

The other stopping point is affordability. A move to a new lender is assessed under MCOB 11's responsible lending rules, against income evidenced now rather than when the loan was first written. A change to self-employment, a car finance agreement taken out since, a shorter term being requested, or a household that has gained a dependant can all produce a smaller maximum loan than the balance being refinanced. None of this applies to a like-for-like product transfer with the existing lender, which is the practical reason that route exists.

The same decision under Regulation Z, and under the Interest Act

In the United States the arithmetic is identical and the paperwork is better standardised. Regulation Z requires a Loan Estimate within three business days of application under 12 CFR 1026.19(e) and a Closing Disclosure at 12 CFR 1026.19(f), and the tolerance categories in 12 CFR 1026.19(e)(3) constrain how far certain quoted charges may move between the two documents. That gives a refinancing borrower something a UK borrower has to assemble by hand: a single itemised page of the switching cost, early enough to divide by a monthly saving before committing.

Two Regulation Z details bear directly on the break-even month. Discount points are a fee bought in exchange for a lower rate, which is the fee-versus-rate crossover in the table above with a different name and the same crossover balance arithmetic. And the disclosed APR spreads those costs across the full loan term, so on a thirty-year note it flatters a fee that a borrower who refinances or sells in five years will never amortise. The UK equivalent, the APRC on the ESIS illustration — introduced by the Mortgage Credit Directive (2014/17/EU) and carried into the FCA's own MCOB disclosure rules — has the same defect for the same reason: it assumes the reversion rate applies for the rest of the term, which is the one outcome the whole exercise exists to avoid. Neither figure is wrong; both answer a question about a loan held to maturity, and this is a question about a five-year window.

Refinancing a principal dwelling with a new creditor also carries the three-business-day right of rescission at 12 CFR 1026.23, which is a real constraint on timing rather than a formality — funds do not disburse until it expires. In Canada the equivalent pressure point is the prepayment penalty: the Interest Act limits what may be charged on a mortgage more than five years old to three months' interest, while inside a closed term the penalty is typically the greater of three months' interest and an interest rate differential calculated by the lender's own method. The Cost of Borrowing (Banks) Regulations under the Bank Act require the amount and its basis to be disclosed, and the amount is what belongs in the numerator. Getting the figure in writing on the intended discharge date is the only reliable way to price it, because the differential moves with rates between the quote and the discharge.

When the honest answer is that it barely matters

The arithmetic on this loan ends somewhere unsatisfying and worth saying plainly: measured against the product transfer, the fee-paying offer is roughly level over its own fixed period. Not obviously good, not obviously bad — nine pounds, which is inside the error of every assumption feeding it. When a comparison lands there, the price has stopped being the deciding factor and the terms should decide instead: the overpayment allowance, whether the deal is portable if the house is sold, what the early repayment charge does in each year, and how quickly the lender answers the phone.

What the four months are actually for is making sure the reversion rate never gets a payment. That is the £384.50 a month that dwarfs everything else on this page, and it is lost to a diary rather than to a bad choice between two reasonable products.