How the refinance calculator works out the saving
The calculator performs two standard principal and interest repayment calculations on the same loan balance and the same remaining term. The first uses the current interest rate and the second uses the proposed rate. The difference between the two monthly repayments is reported as the monthly saving. Because the balance and the term are identical in both calculations, the comparison isolates the effect of the rate, which is the basis on which competing home loans are most fairly compared.
Two further figures are derived from the monthly saving. The break-even period is the switching costs divided by the monthly saving, rounded up to a whole month, and it indicates how long the new loan must be retained before the costs of moving are recovered. The total saving is the monthly saving multiplied by the number of months remaining, less the switching costs. Where the proposed rate is not lower than the current rate, the calculator reports no saving and no break-even period. Both rates are assumed to remain constant, so every result is an estimate and not a forecast.
Choosing the inputs: balance, rates, term and switching costs
The loan balance is the amount currently owing, which appears on a recent statement or in online banking, and not the amount originally borrowed. The current rate is the rate actually charged on the loan today, which may differ from the rate the lender advertises to new customers. The remaining term is the number of years left on the existing contract. Entering the true remaining term is important, because the calculator assumes that the new loan would be repaid over the same period as the old one.
The proposed rate should be a rate for which the borrower is likely to qualify. Lenders generally price loans according to the loan to value ratio, the loan purpose and the repayment type, so an advertised rate reserved for borrowers with substantial equity may not be available to every applicant. The switching costs field takes a single total. A practical approach is to list every fee charged by both the outgoing and the incoming lender, add any government charges and any fixed rate break cost, and enter the sum. Guidance on how rates are set appears in the BorrowWise guide to interest rates.
Why existing borrowers often pay more than new customers
Australian lenders generally compete hardest for borrowers who are actively shopping for a loan. Analysis published by the Reserve Bank of Australia in February 2020 found that variable rate loans written four or more years earlier carried rates around 0.40 percentage points higher than new loans, even for borrowers with similar characteristics. The Reserve Bank attributed the gap largely to lenders increasing the discounts offered to new and refinancing customers over time, while leaving the standard variable rates that apply to existing loans unchanged.
The home loan price inquiry conducted by the Australian Competition and Consumer Commission reached a similar conclusion. Its final report, released in December 2020, found that borrowers with loans between three and five years old were paying on average about 0.58 percentage points more than borrowers with new loans, and that the difference exceeded one percentage point for loans more than ten years old. The inquiry recommended that lenders prompt borrowers with older loans to review their rate. The figures have moved since, but the pattern explains why a periodic review is widely regarded as worthwhile. The Reserve Bank publishes average rates on new and outstanding loans each month, which provides a useful benchmark.
Refinancing costs in Australia: discharge fees, break costs and LMI
Refinancing costs reduce the benefit of a lower rate and belong in the switching costs field. They commonly include a discharge or settlement fee charged by the outgoing lender, state or territory government fees for releasing the old mortgage and registering the new one, and any application, valuation, legal or settlement fees charged by the new lender. Early exit fees were prohibited on loans entered into from 1 July 2011, although reasonable administrative discharge fees remain permitted. Some lenders waive their own upfront fees for refinancing customers, and it is reasonable to ask.
Two costs deserve particular attention because either may exceed several years of rate savings. Where the existing loan is within a fixed rate period, the lender may charge a break cost reflecting its loss from early repayment, and that amount may be substantial when market rates have fallen since the rate was fixed. Where the new loan exceeds 80% of the current property value, lenders mortgage insurance is generally payable again, because a premium paid on the original loan does not ordinarily transfer to a new lender. A written payout figure from the current lender, and an estimate from the BorrowWise LMI calculator, allow both to be measured before an application is lodged.
Illustrative example: the break-even period on a $500,000 loan
Consider a hypothetical borrower with a balance of $500,000, 25 years remaining and a current rate of 6.50% per annum, who is offered 6.00% per annum elsewhere. These rates are illustrative only. The calculator shows a current repayment of approximately $3,376 per month and a new repayment of approximately $3,222, a monthly saving of about $155. With switching costs of $1,500, the break-even period is ten months. If the loan were retained for the full 25 years at those constant rates, the saving after costs would be approximately $44,900.
The result changes markedly when the costs are higher. If the same hypothetical borrower also faced a fixed rate break cost, so that switching costs totalled $8,000, the break-even period would lengthen to 52 months, or four years and four months, and the saving over the term would fall to approximately $38,400. A smaller rate reduction has a similar effect. Moving from 6.25% to 6.00% on the same loan would save about $77 per month, and costs of $1,500 would take 20 months to recover. A borrower who expected to sell the property within that period would be unlikely to benefit from switching.
The loan term trap: a lower repayment is not always a saving
Many refinanced loans are written over a fresh 30-year term, even where the old loan had fewer years to run. The longer term reduces the monthly repayment, which can make the new loan appear more attractive than it is. In the hypothetical example above, refinancing $500,000 at 6.00% over 30 years instead of 25 would lower the repayment to approximately $2,998 per month. Total interest over the full term would, however, be approximately $579,000, compared with approximately $513,000 for remaining on the old loan at 6.50% for 25 years.
In that illustration the lower rate would cost roughly $66,000 more in interest, solely because the debt would be outstanding for five additional years. The calculator avoids this distortion by holding the remaining term constant. Borrowers who do accept a longer contractual term may preserve the benefit of the lower rate by continuing to pay at least the previous repayment amount, since the excess is applied to principal. The BorrowWise extra repayments calculator shows how quickly a loan is repaid when the old repayment is maintained at the new rate.
How Australian lenders assess a refinance application
A refinance is a new credit application. The incoming lender will generally verify income and living expenses, review existing debts and credit history, and obtain a valuation of the property. The Australian Prudential Regulation Authority expects banks to assess whether a borrower could meet repayments at an interest rate at least 3 percentage points above the loan rate. A borrower whose income has fallen, whose expenses have risen or whose other debts have grown since the original approval may therefore find that a loan they are repaying comfortably does not satisfy a new serviceability assessment.
APRA has acknowledged this difficulty. In guidance issued to banks in June 2023 it confirmed that lenders may approve loans as exceptions to their serviceability policy, including for refinancing borrowers with a sound repayment history, provided that such exceptions remain prudent and limited. The practice varies between lenders and approval cannot be assumed. The valuation also matters, because a lower than expected figure raises the loan to value ratio, which may affect both the rate offered and whether lenders mortgage insurance applies. The BorrowWise borrowing power calculator and home equity calculator provide a preliminary indication of both positions.
Common mistakes when comparing home loans
A frequent error is to compare headline rates and ignore ongoing fees. An annual package fee of several hundred dollars offsets part of the rate saving every year, and the comparison rate, which combines the interest rate with most fees for a standard loan size, is a better starting point. Cashback offers require similar care. On a hypothetical $500,000 loan with 25 years remaining, a rate that is 0.10 percentage points higher costs about $31 per month, so a $2,000 cashback would be consumed in roughly five and a half years and the higher rate would continue thereafter.
Other common mistakes include relying on an introductory rate that reverts to a higher rate after a year or two, overlooking the loss of features such as an offset account or unrestricted redraw, and underestimating the costs of leaving a fixed rate loan. Several credit applications within a short period may also be recorded on a credit report. It is generally preferable to narrow the choice to one or two suitable loans before applying. The BorrowWise guide to fixed and variable rates discusses the relevant trade-offs in more detail.
Acting on the result: negotiate first, then consider switching
A result showing a worthwhile saving does not necessarily require a change of lender. Both the Reserve Bank and the ACCC have observed that existing borrowers may obtain a lower rate by asking their current lender for one, and a repricing request involves no discharge fee, valuation or new application. A practical sequence is to identify the rate available to new customers, ask the existing lender to match it, and enter any revised offer into the calculator with switching costs of nil to compare it with the external alternative.
Where switching remains the better outcome, the break-even period serves as the principal test. A period of a year or less suggests that the costs are modest relative to the benefit, while a period of several years calls for confidence that the property and the loan will be retained for that long. Borrowers may also weigh features, service and the flexibility to make extra repayments. The figures produced here are general information only, and an accredited mortgage broker or the lender concerned can confirm actual rates, fees and eligibility.
Refinance Calculator: frequently asked questions
Is it worth refinancing a home loan in Australia?
Refinancing may be worthwhile where the saving from a lower rate exceeds the switching costs within a reasonable time, and where the borrower expects to retain the loan well beyond that break-even point. The calculator estimates the monthly saving, the break-even period and the net saving over the remaining term. Loan features, fees and the prospect of approval are also relevant considerations.
How much does it cost to refinance a home loan?
Refinancing costs commonly include a discharge fee payable to the current lender, government fees for releasing and registering the mortgage, and any application, valuation or settlement fees charged by the new lender. Together these often amount to somewhere between several hundred dollars and a few thousand dollars. Fixed rate break costs and lenders mortgage insurance, where they apply, may add considerably more.
How is the refinance break-even period calculated?
The break-even period is the total switching costs divided by the monthly repayment saving, rounded up to the next whole month. As a hypothetical illustration, costs of $1,500 and a saving of $155 per month produce a break-even period of ten months. Savings realised after that point represent the net benefit of refinancing, provided the rate difference continues.
How much lower should the interest rate be to justify refinancing?
There is no fixed threshold. A small reduction on a large balance may produce a greater saving than a large reduction on a small balance, and the switching costs differ for every borrower. The more reliable test is the break-even period. Where the costs would be recovered within a year or two, and the loan is likely to be retained for longer, the reduction may be sufficient.
Will lenders mortgage insurance be payable again when refinancing?
It may be. Lenders mortgage insurance does not ordinarily transfer between lenders. Where the new loan exceeds 80% of the current valuation of the property, the new lender is likely to require a new premium, which may outweigh the rate saving. Where the loan to value ratio has fallen to 80% or less through repayments or a rise in value, no premium is ordinarily required.
Can a fixed rate home loan be refinanced before the fixed term ends?
Yes, although the lender may charge a break cost where the loan is repaid before the fixed period expires. The amount depends on the balance, the time remaining and the movement in wholesale funding rates since the rate was fixed. Borrowers may request a written break cost quotation from the lender and include that figure in the switching costs entered in the calculator.
Does refinancing affect a credit score?
Each home loan application is recorded as an enquiry on the credit report of the applicant, and a number of applications within a short period may be viewed unfavourably by lenders. A single application followed by a well conducted loan is unlikely to cause lasting harm. Narrowing the choice before applying, instead of applying to several lenders at once, limits the number of enquiries recorded.
Is it better to ask the current lender for a lower rate before refinancing?
It is generally a sensible first step. Research by the Reserve Bank and the ACCC has found that existing customers often pay more than new customers for a comparable loan, and lenders may reduce the rate on request in order to retain a borrower. A reduction obtained in this way involves no switching costs, so the full saving is available from the outset.
Sources for the refinance guide
- ACCC: Home loan borrowers missing out on significant savings by not switching (media release, December 2020)
- ACCC: Home loan price inquiry, final report
- Reserve Bank of Australia: Do borrowers with older mortgages pay higher interest rates? (Statement on Monetary Policy, February 2020, Box C)
- Reserve Bank of Australia: Lenders' interest rates
- APRA: Housing lending standards, reinforcing guidance on exceptions (June 2023)