How long should it take to break-even with a refinance to a lower home loan rate?

Posted in: Insights

15/07/2022

It’s winter 2022, Australians are seeing prices increase across most of the common expenses in life, and in particular the top priorities: 

  • Putting food on the table
  • Pumping fuel into the car
  • Keeping a roof over the head 

It can be a difficult and tedious task to find immediate real dollar savings when assessing the monthly budget, especially if crunching the options between supermarket or fuel pump prices. You could look at the disposable lifestyle options such as the Netflix and Kayo subscriptions, or the weekly trip to a café or a pub…but you should be able to live with some enjoyment still, shouldn’t you? Surely, we shouldn’t have to cut out all the fun stuff.

You should look at the bigger items that may seem like they fall into the ‘too hard’ basket, it’ll likely be more beneficial than tipping out the swear jar or searching down the crevices of your car. The most successful penny pinchers can be the ones who regularly review the big (and tedious to establish) expenses such as home loans, credit cards, personal loans insurance policies, and energy providers. In the case of a home loan, cost savings can be substantial by simply switching lenders to a cheaper product, but there will be an immediate cost to do so. 

How can you judge if the potential savings of a refinance will outweigh the upfront cost? The simple answer is time, you should expect to break-even on the cost to refinance within a relatively short time frame. The costs to refinance can range from $600 - $1,000 and typically include:

  • Outgoing lender’s discharge fee
  • State revenue office fees for new mortgage registration and mortgage discharge
  • New lender’s setup & settlement fees

The suggestion would be to hit a break-even point before reaching 6 months with a new lender, with dollar savings gained over the backend of the first year. Some lenders offer incentives to refinance, looking to ease the upfront costs associated. These incentives, such as cash backs or frequent flyer points, are designed to bring forward the break-even point and allow customers to save dollars sooner. Once the break-even point is reached, you will find that you can make substantial savings within your monthly budget. The whole idea is to find a realistic way to free-up some financial space to keep the main priorities in line, and to keep some of the fun items rolling.

A refinance could be as simple as a straight home loan for home loan swap, or it could be more complicated involving further debt consolidation, a re-structure, or an increase to free-up cash to spend elsewhere. The easiest way to establish if refinancing could be beneficial for you is to chat to a Bernie Lewis Home Loans Mortgage Broker, simply by calling 8300 8300 or getting in touch with your broker here