How long does it take to break even after refinancing?


Liron Nehmadi
Nov 25, 2016( 5 min read )

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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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