Refinancing a home loan may offer substantial savings, but the key question is whether the dollar benefit outweighs the costs involved.

The critical calculation is this: will the reduction in your monthly repayments cover the refinancing fees and charges before you plan to move or sell your property?

If the answer is yes, refinancing could put significant savings back into your pocket.

If no, it might be better to wait.

Understanding the break even point
Refinancing makes financial sense when the combined interest savings and any incentives – such as cashback offers or waived fees – exceed your total refinancing costs within your expected timeframe.

This timeframe is called the break even point and it’s essential to calculate it before making a decision.

You can calculate your break even point with this simple formula:

Break even point (months) =Total refinancing costs / Monthly saving on repayments

For example, if refinancing costs (including lender exit fees, application fees, valuation and settlement charges) total $2,400 and your new loan saves you $150 a month, then your break even point is 16 months.

If you plan to hold onto your property longer than 16 months, the refinancing will potentially save you money overall.

Typical refinancing cost and savings figures

• Refinancing costs:
  Usually range from $1,000 to $3,000 depending on your lender and loan type.
• Monthly repayment savings:
  A 0.5% interest rate reduction on a $500,000 loan could potentially save you around $2,000 in the first year alone.
• Added incentives:
  Some lenders offer cashback promotions from $2,000 to $4,000. This may offset upfront costs and accelerate your savings.

Important factors to consider

• If your total interest saving over 2 to 3 years is less than the cost to refinance, it might not make financial sense to proceed even if the loan rate looks more attractive.
• If you plan to sell or move before reaching your break even point, refinancing probably won’t deliver any net benefit.
• For fixed rate loans, be mindful of any break costs foran early exit. These could be substantial and may change your cost benefit analysis.
• Look beyond advertised interest rates. Focus on the overall costs, fees, loan features and flexibility that suit your situation.

Other benefits of refinancing to keep in mind
In addition to monthly repayment savings, refinancing could help you:

• Access features such as offset accounts, redraw facilities or more flexible repayment options.
• Lock in a fixed interest rate to protect yourself from future rate hikes to provide peace of mind.
• Consolidate other debts into your home loan for simpler finances and potentially lower interest costs.
• Shorten your loan term if you can afford higher monthly repayments. This will possibly save thousands in interest over time.

Bottom line
Refinancing pays off when your monthly savings plus any incentives are greater than your upfront and ongoing costs – ideally within a couple of years.

Use the break even formula to keep your focus firmly on the dollar figures, not just the advertised interest rate.

When the numbers stack up, refinancing may give you a genuine financial edge. It may provide a meaningful advantage and potentially enable you to achieve full home ownership in a shorter timeframe.

If considering refinancing, it’s wise to seek expert guidance from our trusted finance specialists to ensure the strategy is designed for your unique circumstances.