Is refinancing worth it? The real cost of switching home loans
Refinancing to a lower rate can save you thousands, but it is not free, and it is not always the right call. The good news is that the maths is simple once you know the numbers to plug in. Here is how to decide.
The simple break-even test
The core question is: how long does it take for your monthly saving to pay back the cost of switching? That is your break-even point.
Add up the switching costs, then divide by your monthly saving:
As a rule, if you will break even within a year and plan to keep the loan well beyond that, refinancing is usually worth it.
What switching actually costs
For most borrowers on a variable loan, total costs land between $500 and $2,000:
| Cost | Typical range |
|---|---|
| Discharge fee (old lender) | $150 to $500 |
| Application / settlement fee (new lender) | $0 to $600 |
| Valuation | $0 to $400 (often waived) |
| Government registration fees | around $150 to $350 |
The fixed-rate trap
If any part of your loan is on a fixed rate, breaking it early can trigger a break cost, the lender's charge to recover the interest they expected to earn. Unlike the fees above, break costs can run into the thousands on a larger loan, depending on how rates have moved since you fixed.
This does not automatically rule out refinancing, but it changes the maths. Always ask your current lender for a written break cost figure before you decide, and fold it into your break-even calculation.
Do not let cashback do the deciding
Lenders often dangle cashback offers or fee waivers to win refinancers. These can genuinely offset your switching costs, but a generous cashback attached to a so-so rate is a poor trade over a 25 or 30 year loan. The rate, and the comparison rate that includes fees, should drive the decision. Treat cashback as a tie-breaker, not the headline.
When refinancing might not be worth it
- You are about to sell. If you will not hold the loan long enough to clear the break-even point, the costs may outweigh the savings.
- Your loan balance is small. On a low balance, even a decent rate cut produces a modest dollar saving that fees can eat up.
- Steep break costs. A large fixed break cost can wipe out the benefit.
- Your equity has fallen. If your LVR has crept above 80%, you might face LMI again or lose access to the sharpest rates.
A smarter first step: ask before you switch
Before going through a full refinance, it is often worth calling your current lender and asking for a rate review. Banks would frequently rather discount your rate than lose your loan to a competitor. If they sharpen it enough, you get most of the benefit with none of the switching cost. If they will not move, you have lost nothing, and you refinance.
The bottom line
Refinancing is worth it when your savings clear the switching costs quickly and you will keep the loan long enough to enjoy the difference. Run the break-even test, get a break cost figure if you are fixed, and ignore the shiny cashback until you have compared the rates properly.