How long does a refinance take to pay for itself?
The break-even point is your switching costs, less any cashback, divided by the monthly saving. The bigger the rate cut and the smaller the costs, the sooner you are ahead; after that, the saving is yours for as long as you keep the loan and the rate gap holds.
| Current rate | Monthly saving | Break-even if switching costs $1,000 | Break-even if switching costs $3,000 | Interest saved over 5 years |
|---|---|---|---|---|
| 6.49% (0.25 points higher) | $78 | 13 months | 39 months | $6,217 |
| 6.74% (0.50 points higher) | $156 | 7 months | 20 months | $12,447 |
| 7.24% (1.00 points higher) | $316 | 4 months | 10 months | $24,940 |
The costs of switching
Moneysmart lists the fees and charges to compare before you switch:
- Discharge (or termination) fee when you close your current loan.
- Application fee for the new loan, or a switching fee if you move to another loan with the same lender.
- Break fee if you are leaving a fixed rate loan early.
- Stamp duty, which may apply when you refinance: check with your lender.
- Lenders mortgage insurance if you have less than 20% equity, which can outweigh the saving.
Government fees to register the new mortgage and discharge the old one, and settlement or valuation fees, also add up. Enter them all in the calculator. If a lender offers a cashback, treat it as a reduction in your costs and compare the loans over the time you expect to keep them, not just on the cashback.
Keep the same loan term
The calculator keeps the years left on your loan the same. Moneysmart warns that a new loan can quietly reset the term: spreading the balance over 30 years again lowers the repayment but adds years of interest. Ask for a term that matches what you have left.
You'll be assessed again
A refinance to a new lender is a new loan, so the lender checks you could afford it at its rate plus at least 3 percentage points. Some borrowers who comfortably pay their current loan can't pass that test. Check with the mortgage stress test calculator and the borrowing power calculator, and read our guide to refinancing your home loan for the steps and documents.
Refinancing questions
Is it worth refinancing for 0.5%?
Often, if your costs are modest and you'll keep the loan. On $500,000 with 25 years left, a rate 6.24% instead of 6.74% saves about $156 a month, so $1,000 of switching costs is recovered in 7 months and the interest saved over 5 years is about $12,447.
How much does it cost to refinance?
It depends on both lenders. Moneysmart lists the costs to compare: a discharge fee to close your current loan, an application fee for the new one, a switching fee if you change loans with the same lender, a break fee if you are on a fixed rate, possibly stamp duty, and lenders mortgage insurance if you have less than 20% equity.
How long does it take to break even on a refinance?
Divide your switching costs, less any cashback, by the monthly repayment saving. The calculator does this for you and rounds up to whole months.
Can I refinance with less than 20% equity?
Usually, but the new lender may charge lenders mortgage insurance, which Moneysmart warns can outweigh the saving. Moneysmart suggests asking for a refund of some of the LMI on your current loan if you switch.
Should I ask my current lender for a better rate first?
Yes. Moneysmart suggests telling your lender you plan to switch; to keep your business it may cut your rate, which saves the switching costs entirely. Compare any offer with the other loans you're considering.
