Should you refinance? The break-even maths

Start with why, not with the rate

“Rates have moved, should I refinance?” is the wrong opening question, because the answer depends entirely on what you are trying to achieve.

There are really four reasons to refinance:

1. Reduce the interest rate — the obvious one
2. Access equity — renovating, an investment deposit, something significant
3. Restructure — offset, splitting fixed and variable, separating tangled loans
4. Escape a lender — poor service, or policy that blocks what you want to do next

Only the first is actually about the rate. And for reasons two and three, the rate is often the least important variable.

The break-even calculation

The honest test is simple: how long until the savings exceed the cost of moving?

What to count on the cost side

• Discharge fee from your current lender
• Mortgage registration and discharge fees — state government charges
• Application, settlement or valuation fees at the new lender, where they apply
• Break costs if you are in a fixed rate. Not a flat fee — calculated on the lender’s funding position, and they can run into thousands. Always ask for the actual figure before deciding. It cannot be estimated reliably from the outside
• Lenders mortgage insurance, if your loan is above 80% of current value

Against that, count any lender cashback or fee waiver.

Reading the answer

• A few months — usually worth doing
• One to two years — reasonable, if you expect to keep the loan well beyond that
• Three to four years — only if you are confident you will hold this loan considerably longer
• Beyond that — unlikely to be worth the effort

You can model the basic version on the refinance calculator. It deliberately leads with break-even rather than the monthly saving, because showing only the saving makes almost any refinance look worthwhile.

The one phone call worth making first

Before anything else: call your current lender.

Lenders price to retain. Existing customers are frequently on worse rates than the ones being advertised to new ones, and a retention team can often improve it — particularly if you can credibly say you have an offer elsewhere.

If they match or come close, you have saved yourself several weeks of paperwork and a credit enquiry. If they do not, you now know your actual position rather than guessing at it.

This costs one phone call and it sometimes solves the entire problem.

What lenders look at on a refinance

A refinance is a new application, assessed on your circumstances now — not the ones you had when you first borrowed. That means:

• Income is reassessed. Changed jobs, gone part-time, gone self-employed, or had a child since? Your capacity may look different
• Expenses are reassessed, including anything you have taken on since
• The property is revalued, which determines your LVR and therefore whether LMI applies
• Repayment history matters. Missed payments on the existing loan are visible and taken seriously

The most common surprise: people who borrowed several years ago on two incomes and are now on one. The existing loan is being paid without issue, but a fresh assessment does not care about that — it cares whether the numbers work today.

Worth knowing before an application rather than after a decline.

The LVR point, which cuts both ways

Against you: if your property has fallen in value, or you borrowed at a high LVR and have not paid much down, you may be above 80% and facing LMI again. That frequently kills an otherwise sensible refinance.

For you: if your property has grown in value and the loan has come down, you may now be comfortably below 80% when you were not before. That puts you in a different pricing tier, removes LMI from the equation, and widens the field of lenders willing to compete.

Nobody sends you a letter when this happens. If you bought three to seven years ago with a small deposit — which describes a great many people across Melbourne’s north — it is worth checking.

Checking costs nothing. If the answer is that you are better off staying put, you will hear that. Book a free chat — no cost, no obligation.

Restructuring: the part people overlook

Refinancing is a chance to fix a structure that no longer fits, and structure often matters more than a small rate difference.

Offset accounts. An offset reduces the interest charged without locking the money away. If you hold a meaningful cash balance, an offset can outperform a marginally lower rate — and the money stays accessible. See the offset calculator.

Splitting fixed and variable. Fixing part gives repayment certainty; leaving part variable keeps flexibility to pay extra. Fixing everything removes flexibility entirely, which is usually a mistake if there is any chance you will sell or pay down early.

Separating tangled loans. If an owner-occupied property and an investment are cross-collateralised, untangling them significantly improves what you can do next. This gets missed a lot and is expensive to leave alone.

Loan term. Refinancing back to a fresh 30-year term lowers the repayment and raises total interest paid. Sometimes that trade is right. It should at least be a decision rather than a default.

When not to refinance

Stated plainly, because a broker who never says this is not assessing anything:

• The break-even is years away
• You would trigger LMI you have already paid once
• Break costs on a fixed loan swamp the benefit
• Your income or employment has changed such that a new application would not be approved on better terms
• You are chasing a rate difference small enough that the effort and the credit enquiry are not justified
• Your current lender will match it

A workable order

1. Call your current lender and ask what they can do
2. Get your current LVR — property value and outstanding balance
3. Ask for the break cost figure if you are on a fixed rate
4. Add up every switching cost
5. Calculate break-even
6. Consider structure, not just rate
7. Then decide

If the answer is “stay where you are”, that is a real answer and worth having.