Switching to a lower-rate loan (refinancing) saves interest — but moving costs money too, mainly the prepayment penalty and some fees. Jump too fast and you can lose. The whole decision comes down to one question: is the interest you'll save bigger than what it costs to move? Here's the math, made simple.
The core formula
It looks complex but the logic is simple: total interest saved over the remaining term, minus the cost of switching. Positive means go.
| Item | Detail |
|---|---|
| Interest saved (approx.) | balance × rate cut (%p) × years remaining |
| Cost to switch | prepayment penalty + lien setup/release + stamp tax, etc. |
| Decision | interest saved − cost > 0 → refinancing pays |
Get the penalty from our prepayment penalty calculator first, and compare monthly payments with the loan interest calculator.
Real costs of switching
| Item | Rough | Note |
|---|---|---|
| Prepayment penalty | balance × rate × remaining/period | Usually 0 after 3 years |
| Lien setup/release | Tens of thousands of won | Some products cover this |
| Stamp tax | Varies by loan size | Usually split 50:50 with the bank |
| Appraisal fee | If collateral is re-appraised | Can apply to mortgage refinancing |
Online refinancing platforms now let you compare rates across banks and switch remotely, cutting the cost and hassle compared to before.
Example: switch for a 0.5%p lower rate?
Say you have a ₩200M mortgage, 10 years left, and a product 0.5%p cheaper. ① Interest saved ≈ ₩200M × 0.5% × 10 = ~₩10M (a bit less in reality as principal shrinks). ② Cost: at year 2, penalty ≈ ₩200M × 1.2% × (12/36) = ₩800,000 plus minor fees. ③ Savings (₩10M) far exceed cost (~₩1M), so refinancing wins. ④ With only 1 year left, savings shrink and may not cover the cost — the longer the remaining term, the bigger the benefit.
When it pays vs. when it doesn't
| Refinancing pays | It doesn't |
|---|---|
| Long term left (3+ years) | Short term left (≤1 year) |
| Big rate cut (0.5%p+) | Small cut and small balance |
| Fee period passed → penalty 0 | Early in the period → large penalty |
| Stable (fixed→fixed) | Moving to variable, rate-rise risk |
In short, the longer the term, the bigger the cut, and the smaller the penalty, the more refinancing pays. Otherwise the math can go negative — check the numbers.
Before you switch — checklist
- ☐ Current loan: rate, balance, term left, prepayment penalty
- ☐ New loan: rate, limit, fees (fixed vs. variable)
- ☐ Run the prepayment penalty calculator
- ☐ Compare interest saved vs. cost → is it positive?
- ☐ If the 3-year fee period ends soon, consider waiting briefly
- ☐ Check limit conditions (credit score, DSR)
Caution. Don't look at rate alone — weigh fixed vs. variable and term left. Refinance to variable and a rate rise can erase the gain. And extending the term lowers the monthly payment but can increase total interest.
FAQ
Q. Is a 0.1%p cut worth switching?
With a large balance and long remaining term, even 0.1%p can matter — but only if it beats the cost. Always judge by "interest saved − cost." Small balances or short terms need a bigger cut.
Q. The prepayment penalty puts me off.
The penalty is a one-time cost; the interest savings accrue over the whole remaining term. With a long term left, savings usually recover the penalty and more. Compare both with the calculators.
Q. Nearly 3 years in — switch now?
Once the fee period ends the penalty is zero, so unless the rate cut is large, waiting days or weeks can be better. Weigh the extra interest against the penalty saved.
Refinancing isn't a gut call — it's arithmetic. Compare interest saved over the remaining term against the cost to move. The longer the term left, the bigger the win.
This is general information, not financial advice. Actual rates, costs, and limits depend on your credit and product — confirm with the bank or a refinancing platform. Thinking of using spare cash instead? See loan payoff vs. saving/investing.
