How long does it take to break even after refinancing?

How long does it take to break even after refinancing?

One of the most common questions that property owners who are considering refinancing have is around the cost of the process:

“How long will it be until I cover my switch cost and actually start saving?”

Once the cost of switching has been clarified, borrowers usually try to understand the actual saving, and the time it will take to cover the switching cost.

To answer this question, it’s important to understand the following:

  1. Switch cost: Everything that goes into calculating the combined switch cost
  2. Refinancing goal: Are you refinancing to reduce your monthly repayments, to access equity, or to get your home loan paid off quicker? Each of these goals means a different repayment scheme, thus changing the overall savings and the time it takes to break even. 

What makes up your overall switch cost?

  • Discharge fee: The Federal Government banned exit fees in 2011, removing one of the biggest barriers to switching home loan providers. Lenders can still legally charge a discharge fee, which is payable when you come to the end of your home loan. These fees average at $304, and at least 134 products don’t have them at all (at time of writing).

  • Setup fee: An ‘upfront’ or ‘application’ fee is a one-off expense you are charged by your bank when you take out a loan. The average start-up fee is around $600, however there are over 1000 loans on the market with none at all (at time of writing). If the loan you want does include an application fee, you may be able to negotiate to have it waived.

  • Break fee: Also known as break costs, these fees are charged when you switch away from a fixed rate home loan while there’s still time remaining on the fixed term. The cost of these fees is based on how far interest rates have come down since you started your loan. Break fees can often prove expensive, so it’s worth seriously considering whether the savings from switching will be worth these costs.

Example:

Eve has decided to refinance her home loan with one of Australia’s big four banks. After comparing her options and consulting her mortgage broker, she decides to switch to a smaller non-bank lender.

When Eve leaves her current lender, she pays the bank’s Discharge Fee of $350. When she makes her application with her new lender, she pays a $600 application fee. And once her switch is approved, she pays a $100 settlement fee. 

Overall, Eve’s total switching cost is $1050 – she won’t break even on her new home loan until her savings reach this figure. 

Some example refinancing home loans:


Refinance goal

Goal: Reduce monthly repayments

As an example, let’s say your current mortgage is $600,000 on a 5% interest rate and you are left with 20 years of repayments. This means your current monthly repayment is $3960.

If you refinance to a home loan with a 3.64% interest rate you could reduce your monthly repayment to $3520.

Assuming a total switching cost of $1000, we can compare the figures in the following table and determine the length of time until you break even and start saving on your refinance: 

Borrowing amount $600,000
Old loan term 20 Years
New loan term 20 Years
Old interest rate 5%
New interest rate 3.64%
Old monthly repayment $3,960
New monthly repayment $3,523
Monthly saving $437
Switch cost $1000
Time to break even 65 Days
Total saving over 12 months $3,807
Total saving over 5 years $24,783

Goal: Pay loan quicker

Even if you refinance your home loan onto a lower interest rate, you may want to think about continuing to make the same repayments each month. Extra money you pay onto a home loan goes towards the principal, rather than the interest. This can get you ahead on your repayments, get your loan paid off faster, and ultimately save in total interest paid over the full loan term.

Borrowing amount $600,000
Old loan term 20 Years
New loan term 16.9 Years
Old interest rate 5%
New interest rate 3.64%
Old monthly repayment $3,960
New monthly repayment $3,960
Monthly saving (in interest 5yr average) $688
Switch cost $1000
Time to break even 45 Days
Total saving over 12 months $6,500
Total saving over 5 years $39,612

Calculating your own savings

Whatever your refinancing goal, working out your switching costs and the length of time until you break even doesn’t have to be too tricky, as most of the information you’ll need can be found right here at RateCity.

While you’ll need to contact your current lender to determine the discharge fees or break costs for your existing mortgage, you can find the estimated upfront fees and charges for different mortgages by comparing home loans at RateCity:

And to see the effects that different interest rates, loan terms and other factors can have on your home loan repayments when you switch, and from there, to determine approximately how long it will take to break even with your switching costs, you can use our home loan calculator:

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Learn more about home loans

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

What is an ongoing fee?

Ongoing fees are any regular payments charged by your lender in addition to the interest they apply including annual fees, monthly account keeping fees and offset fees. The average annual fee is close to $200 however there are almost 2,000 home loan products that don’t charge an annual fee at all. There’s plenty of extra costs when you’re buying a home, such as conveyancing, stamp duty, moving costs, so the more fees you can avoid on your home loan, the better. While $200 might not seem like much in the grand scheme of things, it adds up to $6,000 over the life of a 30 year loan – money which would be much better off either reinvested into your home loan or in your back pocket for the next rainy day.

Example: Anna is tossing up between two different mortgage products. Both have the same variable interest rate, but one has a monthly account keeping fee of $20. By picking the loan with no fees, and investing an extra $20 a month into her loan, Josie will end up shaving 6 months off her 30 year loan and saving over $9,000* in interest repayments.

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

How do I calculate monthly mortgage repayments?

Work out your mortgage repayments using a home loan calculator that takes into account your deposit size, property value and interest rate. This is divided by the loan term you choose (for example, there are 360 months in a 30-year mortgage) to determine the monthly repayments over this time frame.

Over the course of your loan, your monthly repayment amount will be affected by changes to your interest rate, plus any circumstances where you opt to pay interest-only for a period of time, instead of principal and interest.

How does Real Time Ratings work?

Real Time RatingsTM looks at your individual home loan requirements and uses this information to rank every applicable home loan in our database out of five.

This score is based on two main factors – cost and flexibility.

Cost is calculated by looking at the interest rates and fees over the first five years of the loan.

Flexibility is based on whether a loan offers features such as an offset account, redraw facility and extra repayments.

Real Time RatingsTM also includes the following assumptions:

  • Costs are calculated on the current variable rate however they could change in the future.
  • Loans are assumed to be principal and interest
  • Fixed-rate loans with terms greater than five years are still assessed on a five-year basis, so 10-year fixed loans are assessed as being only five years’ long.
  • Break costs are not included.

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.

What are extra repayments?

Additional payments to your home loan above the minimum monthly instalments, which can help to reduce the loan’s term and remaining payable interest.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

How can I pay off my home loan faster?

The quickest way to pay off your home loan is to make regular extra contributions in addition to your monthly repayments to pay down the principal as fast as possible. This in turn reduces the amount of interest paid overall and shortens the length of the loan.

Another option may be to increase the frequency of your payments to fortnightly or weekly, rather than monthly, which may then reduce the amount of interest you are charged, depending on how your lender calculates repayments.

What is a comparison rate?

The comparison rate is a more inclusive way of comparing home loans that factors in not only on the interest rate but also the majority of upfront and ongoing charges that add to the total cost of a home loan.

The rate is calculated using an industry-wide formula based on a $150,000 loan over a 25-year period and includes things like revert rates after an introductory or fixed rate period, application fees and monthly account keeping fees.

In Australia, all lenders are required by law to publish the comparison rate alongside their advertised rate so people can compare products easily.

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.