Refinance calculator: your real saving and the month a switch pays for itself

How does a refinance home loan calculator work?

A refinance home loan calculator compares the loan you have with the one you've been offered, and tells you whether the difference is worth the cost of moving. You put in what you owe, your current rate, the years left, the rate you've been offered and what the switch will cost.

It then works out the new repayment on the same years you have left, the monthly saving, and the number of months that saving takes to pay back your costs. You can also add an offset balance and up to four other debts, such as a car loan or a credit card [3].

Why do other refinance calculators show a bigger saving?

Other refinance calculators often show a bigger saving because they put the new loan on a fresh 30-year term. If your loan has 22 years left, stretching it to 30 lowers the repayment on its own, before the rate does anything, and the calculator counts that as saving.

An illustration, not a quote: $500,000 owed, 22 years left, moving from 6.5% to 6.0% [1].

Keeping your remaining term saves about $39,400 in interest against staying put. Taking a fresh 30 years drops the repayment by about $567 a month, but adds about $138,000 of interest compared with staying where you are.

What this means for you: a lower repayment and a cheaper loan aren't the same thing. If a calculator or a lender shows you a saving, check which term it used. When you refinance, ask for the years you have left, not a new 30.

When does refinancing pay for itself?

Refinancing pays for itself in the month your total saving passes what the switch cost you. That month is the break-even, and it's the number that decides whether a switch is worth it.

In the illustration above, the saving is about $149 a month. With $1,500 of costs, it takes 11 months to win them back [1]. The calculator rounds up to a whole month, so a break-even of 10 and a bit shows as 11 [3].

The test is simple: if you'll keep the loan longer than the break-even, the switch comes out ahead. If you're likely to sell, or move the loan again, before then, it loses money.

How much lower does the new rate need to be?

How much lower the new rate needs to be depends on your costs and your balance, which is why there's no single rule. The table below holds the loan at $500,000 with 22 years left at 6.5%, and changes only the rate you move to [2].

What this means for you: a cut of a quarter of a percent can still be worth it, but only if your costs are low and you'll keep the loan for years. A bigger cut forgives higher costs. Put your own figures into the calculator above and the break-even tells you which side of the line you're on.

Does a small loan or only a few years left change the answer?

Yes. A small balance or only a few years left shrinks the monthly saving, so the same costs take much longer to win back. The table holds the rate cut at 0.5%, from 6.5% to 6.0%, and changes the loan [2].

What this means for you: switching costs are mostly fixed, whatever the size of the loan. On a large loan with many years left, they're paid back quickly. On a small loan near its end, the saving may never get there.

Coming off a fixed rate, or breaking one early

A fixed rate changes the sums in two ways, depending on whether it has ended. Break it early and you may pay a break cost on top of the usual fees. Wait until it ends and there's no break cost at all.

In the part 4 illustration, $1,500 of fees pays back in 11 months. Add a $2,000 break cost and it takes 24 months. Add $3,000 and it's 31 months; add $5,000 and it's 44 months [1].

When a fixed rate ends, the loan moves to another rate, and it may be higher than you'd expect, without anything arriving to tell you. That makes the end of a fixed period the cheapest time to run these numbers: no break cost, and a clear rate to compare.

What this means for you: if you're inside a fixed rate, get the break cost in writing before you do anything else. If it ends soon, waiting can be worth more than the new rate.

Will you pay LMI again when you refinance?

You can, if you'd owe more than 80% of your home's value with the new lender. That share is your LVR, the loan as a share of the property's value. Above 80%, the new lender usually charges lenders mortgage insurance (LMI) again, even if you paid it when you bought. LMI is insurance that protects the lender, and you pay for it.

Here's what it can cost on a home valued at $600,000, from one insurer's published rate card, which adds no loading for a refinance, though its refinance criteria apply [4]:

These figures are illustrations from one insurer's card, not quotes. LMI varies from lender to lender.

A professional LMI waiver can sometimes help, but read its terms. Suncorp's waiver for medical practitioners, for example, goes to 90% but doesn't cover refinancing a loan that's already with Suncorp [5]. Which professions get waivers, and where, is on the LMI waiver page.

What this means for you: an LMI bill of several thousand dollars can wipe out years of saving. If you're near 80%, the valuation (part 10) decides whether you pay it, so it's worth knowing roughly where you sit before you apply.

Why the new lender's valuation matters

The new lender's valuation matters because it sets your LVR, and your LVR sets your price and whether you pay LMI. The new lender usually values your home as part of the application, and it may not agree with the figure you have in mind.

A low valuation raises the share of the value you'd owe. That can bring LMI or a smaller loan than you asked for (part 9). A higher one can drop you into a cheaper band. Lenders price loans by how much you owe against the home's value, so paying the loan down or a rise in value can both work in your favour.

Where does a cashback offer go in the sums?

A cashback offer goes against your switching costs: take it off what the move costs you before you put the costs into the calculator. If the cashback covers all your costs, the switch is ahead from the first month and the only question left is the rate.

But compare the rate before the cashback. An illustration, not a quote: one lender offers $3,000 cashback on a $500,000 loan at 6.2% over 25 years; another offers 6.0% with none. The 0.2% difference costs about $1,000 in interest each year, so after about three years the cashback is used up, and every year after that the cheaper rate is ahead [1].

So a cashback is worth chasing only if you expect to move again within a few years. Treat it as a bonus, not the reason to switch.

Can you refinance with the same bank?

Often you can get a better rate from the same bank without refinancing at all, by asking it to review your rate. There's no application, no valuation and no switching cost, so if your lender matches or gets close, the break-even is immediate. If it won't, you've lost a phone call and you have the figures for the calculator.

Lenders often offer new customers a lower rate than they charge existing ones on the same loan. That gap is your reason to ask, and your number to ask with.

Call your lender, ask for the retention or rate review team, and say something like this: "I'm paying [your rate]. You're offering new customers [their rate] on the same loan, and another lender has offered me [the rate you've found]. I'd like to stay, but I'd like my rate reviewed. What can you do?"

Have your balance, your home's rough value and the rates you're comparing in front of you. If they say no, ask what they'd need to see. If they say yes, check the new rate on your next statement. More on this is in the home loan health check.

What if you keep paying your old repayment after you switch?

If you keep paying your old repayment after you switch, the loan is paid off sooner and you save far more interest than the rate cut alone. The calculator shows the saving as a lower repayment; you can choose to keep paying the higher one instead.

In the same illustration, $500,000 moved from 6.5% to 6.0% with 22 years left: keep paying the old $3,565 instead of the new $3,415, and the loan is paid off about 21 months sooner, with about $38,000 less interest than paying the new repayment [2]. Against staying where you were, that's about $77,400 less interest.

To see what extra repayments do on your own loan, use the repayment calculator.

How does an offset account change the numbers?

An offset account lowers the interest you pay, because the lender charges interest only on what you owe less what's in the offset. Add the balance you'd keep in it after the switch, and the calculator shows how much sooner the loan is paid off and the interest saved, on the new rate and your remaining term [3].

An illustration: $500,000 at 6.0% with 22 years left, paying the normal repayment, with $30,000 held in an offset the whole way. The loan is paid off about 21 months sooner, with about $73,900 less interest [2].

The calculator assumes the offset balance stays the same for the whole loan. Real balances go up and down, so treat the result as a guide to the size of the effect, not a forecast.

Rolling a car loan or credit card into the refinance

Rolling a car loan or credit card into a refinance lowers your monthly repayment, but it can raise the total interest, because the home loan spreads the debt over many more years. The calculator adds up to four other debts and shows the interest both ways: kept separate, and rolled in [3].

An illustration: a $30,000 car loan at 9% over 5 years costs about $7,400 in interest. Rolled into a home loan at 6% with 22 years left, the same $30,000 costs about $24,100 in interest [1].

There's a middle way. In the same illustration, roll it in at the lower rate, then pay it off over the same 5 years, about $580 a month on top of the home loan repayment. The interest on the $30,000 drops to about $4,800, less than the car loan would have cost [2].

What this means for you: rolling debts in only saves money if you keep paying them off at the pace you would have. The lower monthly repayment is the trap. More on this is on debt consolidation home loans.

Refinancing to release equity: what the calculator can and can't show

Refinancing to release equity means borrowing more than you owe now, against the value your home has built up. The calculator doesn't work out how much equity you could release; it compares the loan you have with the loan you'd move to.

What sets the limit is your LVR. Owing 80% or less of the value usually means a new lender won't charge LMI (part 9). Lenders also ask what the extra money is for, and some limit what they'll lend for, so have the purpose and the amount clear before you apply.

If the equity is for an investment property, the order you do things in matters. See using equity to buy an investment property.

Can you still borrow what you owe?

Not always, and it's worth knowing before you apply. A new lender assesses you afresh, on your income, debts and living costs today, not the ones you had when the loan settled.

It also checks you could still make the repayments if rates were 3 percentage points higher than the rate you'd pay, the minimum buffer APRA expects banks to use [7]. If your income has dropped, your family has grown or you've taken on new debts, a new lender might lend you less than you owe now, and the switch can't happen however good the rate is.

That's one more reason to ask your own lender first (part 12): if it reprices your loan, you don't need a new lender to take you on at all.

Bought with the 5% Deposit Scheme? Check before you switch

If you bought with the 5% Deposit Scheme, refinancing can cost you the government's guarantee, which is what lets you skip LMI. You can keep it only by moving to another lender on the scheme's panel, and only without increasing the loan or extending the term [6].

Move to a lender that isn't on the panel and the scheme is lost, so the new lender's LMI rules apply (part 9). A rate change or a product switch with the same lender is fine [6]. The guarantee ends by itself once you owe 80% of the value, measured on your scheduled repayments [6].

More on how the scheme works is on the First Home Guarantee page.

Does the calculator work for an investment loan or an interest-only loan?

The calculator works for an investment loan in the same way as a home you live in: it compares principal and interest repayments over the years you have left [3]. It doesn't count tax, so for an investment loan the after-tax saving will differ.

If you're on interest only, or thinking of moving to it, the repayments work differently. See interest only or principal and interest.

Can you refinance at any time, and how often should you?

You can apply to refinance whenever you choose, but each switch carries its own costs and has to clear its own break-even. There's no set number of times that's right; there's only whether this switch pays for itself before you'd move again.

A switch is usually harder to justify when your loan settled in the last year or so, because you've only just paid the costs of the last one. And LMI isn't carried over: if you paid it when you bought and you'd owe more than 80% with the new lender, it's usually charged again (part 9).

A sensible habit is to run the numbers once a year, and whenever a fixed rate or a discount ends.

What happens when you switch home loans?

When you switch home loans, the new lender pays out the old loan on settlement day and your repayments move to the new one. Before that, you gather your loan statements, payslips or tax returns and ID; the new lender assesses the application and usually values your home; you sign the new loan documents; and your old lender gets a discharge request.

How long it takes depends mostly on the new lender's approval and the old lender's discharge. Your old loan keeps running until settlement, so keep paying it. The full step-by-step is on refinancing your home loan.

What can't a refinance calculator tell you?

A refinance calculator does arithmetic on the figures you put in. It isn't a lender's assessment and it isn't an offer [3].

It doesn't know whether a lender will approve you, what rate you'd actually be offered on your file, or what your current lender would do if you asked. It only counts the costs you enter. For a second opinion on the arithmetic, MoneySmart's mortgage switching calculator is another place to check it.

What does a broker cost you?

How a broker is paid, and the rule Money Brain holds against it, is set out in full on its own page: what a mortgage broker costs.

Your first move

You've got the method: the same years left, every cost counted, and a break-even you'll outlast. The one question left is which rate you'd really be offered, and whether your own lender will match it, and that's what Money Brain works out before anything goes to a lender.

When you're ready, the closing section below is the simplest way to start.