When you fix your mortgage rate, the lender locks in matching wholesale funding for the same period. If you break the fixed rate early — by refinancing, selling the property, or converting to variable — the lender has to unwind that wholesale position. If wholesale rates are now lower than when you fixed, the lender takes a loss and passes it through to you as a 'break cost' (also called economic cost or exit fee). If wholesale rates are now higher than when you fixed, there's no loss to recover — break cost is typically zero or near-zero.

The exact formula each lender uses is non-public and varies. The general shape: (your fixed rate − the lender's current equivalent wholesale rate) × loan balance × remaining time, present-value-discounted. The 'lender's current equivalent rate' is at their discretion and can swing materially day-to-day with bond markets. Always request the formal break-cost figure in writing from your lender before committing to refinance — the calculator above gives a rough ballpark, not the actual number.

The strategic upshot: refinancing or selling during a period when current rates EXCEED your fixed rate is the safest moment, because break cost is typically near zero. Refinancing when rates have fallen below your fixed rate (e.g. cutting from a 6% fix to a 5% variable) involves paying a break cost — sometimes the savings still stack up, sometimes they don't. For overall mortgage decisions see our Refinance Calculator.