The Break-Even Point on Refinancing

Key takeaways

• Break-even months = total switching costs / monthly repayment reduction.
• Interest saved exceeds the repayment reduction - the difference pays down principal.
• Extending the term back to 30 years lowers repayments but can raise total interest.
• Ask for a reprice first - it costs nothing and may remove the need entirely.

What are the actual costs?

Two of these can make refinancing a bad idea on their own. Break costs on a fixed loan where rates have fallen can run to many thousands, and if your LVR is above 80% you may pay LMI again from scratch - LMI is not portable between lenders.

How do you calculate the break-even?

Illustrative: $500,000 remaining, 25 years left, moving from 6.00% to 5.60%, total switching costs $1,200.

Note the last two rows. The repayment falls by $127 a month - about $1,524 a year - while the interest saved is roughly $2,000. The difference is not lost: it goes to principal, so the loan amortises faster. The cash flow benefit and the wealth benefit are different numbers, and the wealth benefit is larger.

What is the trap?

Resetting the term. Refinancing a loan with 22 years remaining into a fresh 30-year loan lowers the monthly repayment substantially - but you have just added eight years of interest.

The repayment looks better and the total cost is worse. If the goal is cash flow relief that may be the right trade, made knowingly. If the goal is saving money, keep the remaining term the same and take the benefit as a faster payoff.

Two other things worth doing before you refinance:

• Ask your current lender to reprice. It costs nothing, leaves no credit enquiry, and often closes most of the gap. Do this first, every time.
• Check the new loan's features - a lower rate with no offset, restricted redraw or a higher annual fee may not be an improvement once your actual usage is accounted for.

Also consider cashback offers carefully. A cashback improves the break-even substantially in year one, but it says nothing about whether the rate remains competitive in year three - and a loan you refinance out of again has cost you two sets of switching costs.

Frequently asked questions

How do I calculate refinancing break-even?

Divide total switching costs - discharge, break costs, registration, any new LMI - by the monthly repayment reduction. The result is the number of months before the refinance pays for itself.

Why is my interest saving bigger than my repayment saving?

Because part of the saving goes to principal rather than showing up as a lower payment. The repayment reduction is the cash flow benefit; the interest saved is the true economic benefit, and it is larger.

Should I extend my loan term when refinancing?

Only deliberately, for cash flow relief. Resetting a 22-year remaining term to a fresh 30 years lowers repayments but adds years of interest, so it costs more overall even at a lower rate.

Do I pay LMI again if I refinance?

If your LVR is above 80% at the new lender, generally yes - LMI is not transferable between lenders. This is a strong reason to wait until your LVR is below 80% before refinancing.

Related reading

• Refinancing Your Home Loan: The Complete 2026 Process
• The Break Cost Formula on Fixed Loans
• Depreciation Schedules and Property Returns

Sources

• Moneysmart - switching home loans — ASIC
• Home loan price inquiry — ACCC