Is refinancing worth it? A worked example with break-even, cashback and term reset

Refinancing is worth it when the interest you save over the time you will keep the loan is larger than the cost of switching, and you keep the loan term the same or shorter. In the illustrative example below, moving a $520,000 balance with 26 years left from 6.49% to 5.89% saves about $194 a month, recovers $1,500 of switching costs in 8 months and saves about $59,000 over the remaining term. The same switch done carelessly, by stretching the loan back to 30 years, lowers the repayment further but costs about $92,000 more in interest than keeping the 26-year term.

This guide is part of how to calculate home loan repayments. All rates and fees are illustrative.

Step 1: your current loan

• Balance: $520,000
• Rate: 6.49% variable, owner-occupier, principal and interest
• Years left: 26 (312 months)
• Current repayment: about $3,454.29 a month
• Interest still to pay if nothing changes: about $557,738

Find these figures on your latest loan statement or in your lender's app. Check whether any part is fixed: if so, ask the lender for a written break cost quote.

Step 2: the new offer and the switching costs

New lender: 5.89% variable for the same loan type, no annual fee. Illustrative switching costs:

Government fees differ by state and territory and change each financial year; check with your land titles office. If the new LVR is above 80%, LMI could add thousands, which usually kills the deal.

Step 3: the monthly saving and break-even

Keep the remaining term at 26 years:

• New repayment at 5.89% over 312 months: about $3,259.87
• Monthly saving: $3,454.29 - $3,259.87 = $194.42
• Break-even: $1,500 / $194.42 = 7.7, so 8 months
• Saving over the remaining term: $194.42 x 312 - $1,500 = about $59,159

Check your own figures in the refinance break-even calculator.

Step 4: test a cashback

Suppose the new lender offers a $2,000 cashback for refinancers, paid after settlement. Net switching cost becomes $1,500 - $2,000 = -$500: you are $500 ahead on day one, and the break-even is immediate.

Cashbacks are worth having but should not decide the switch on their own. Check:

• the minimum loan size and the settlement deadline
• whether the cashback rate is higher than the lender's no-cashback rate
• whether the cashback is clawed back if you leave within a set period

A loan with a $2,000 cashback at 6.09% loses to the 5.89% loan within about two years on this balance, because 0.20 points on $520,000 is roughly $1,000 a year.

Step 5: avoid the term reset trap

Many new lenders default to a 30-year term. On the same $520,000 at 5.89%:

The 30-year option looks best on the monthly figure, $373 lower than today, but it costs about $92,075 more interest than keeping 26 years, and even about $31,400 more than not refinancing at all. If you need the lower repayment, take the 30-year term but keep paying $3,259.87 voluntarily, which repays the loan in about 26 years anyway.

Step 6: ask your current lender first

Before you apply, ring your lender's retention or discharge team with the new offer in writing. Suppose it offers 6.04%:

• Repayment at 6.04% over 26 years: about $3,307.98
• Saving against today: about $146.31 a month, about $45,647 over the term
• No switching costs

The new lender still saves about $48 a month more, or about $13,500 more over the term after its $1,500 costs. On these numbers, switching is still better. A smaller gap, or a large cashback at the existing lender, could tip it the other way. See asking your lender for a lower rate.

Step 7: fixed rate break costs

If you are fixed and the lender quotes a $6,000 break cost, total switching costs become $7,500 and break-even stretches to $7,500 / $194.42 = 39 months. That may still be worth it if you will keep the loan for years, but compare with waiting until the fixed term ends. See fixed rate break costs.

Decision checklist

• Remaining term kept the same or shorter
• Break-even under about two years, unless the saving is large and you are staying long term
• New LVR under 80%, or LMI included in the costs
• Your income and expenses still pass a new lender's assessment, including the serviceability buffer
• Offset, redraw and repayment features at least as good as now
• Current lender given the chance to match

Frequently asked questions

How often can I refinance?

There is no legal limit, but each switch has costs and a credit enquiry. Frequent applications in a short time can concern lenders.

Do I need a new valuation?

Usually yes. The lender orders it, often free for refinancers. A lower valuation than you expect can push your LVR above 80%.

Should I consolidate my car loan into the refinance?

Rolling a five-year car loan into a 26-year mortgage can lower the rate but raise the total interest. If you do it, pay the extra off within the original car loan term.

How long does refinancing take?

Commonly a few weeks from application to settlement, depending on both lenders. See the refinancing process and timeline.

Sources

• ASIC Moneysmart — switching home loans
• ACCC — home loan pricing inquiry findings
• Australian Financial Complaints Authority — disputes about discharge and refinancing