Should You Refinance? The Simple Maths That Actually Answers It

Key takeaway: There’s no rule that says you should refinance after any set number of years. A simple break-even calculation — switching costs divided by the monthly saving — tells you the real answer. And before doing any of that maths, a free phone call to your current lender’s retention team is often worth trying first.

“It’s been a couple of years, should I refinance?” and “Is it worth switching for a rate that’s 0.1% lower?” are two of the most common questions in home lending, and neither one has a calendar-based answer. The time that’s passed since you took out your loan tells you nothing about whether moving makes financial sense right now. A fairly simple sum does.

Step One: Work Out What It Actually Costs to Leave

Switching lenders isn’t free. There’s a discharge fee from your current lender, government registration fees on both ends, and whatever your new lender charges for application, valuation, or settlement. As a rough guide, this typically lands somewhere between $1,000 and $1,200 all up.

Two things can push that number up considerably, and both are worth checking before you go any further:

• If you’re on a fixed rate, breaking it early can trigger a break cost — sometimes running into the thousands. Get this figure in writing before doing anything else.
• If your equity has dropped below 20% since you took out the original loan, Lenders Mortgage Insurance can apply all over again on the new loan, even if you paid it (or avoided it) the first time.

Not every cost applies in every situation. The number that actually matters is your real, specific total — not a generic estimate. Moneysmart’s guide to switching home loans lists the same cost categories (discharge fee, break fee on a fixed loan, LMI if you have under 20% equity, and application fees) and has a calculator that shows how long it takes to recover the cost of switching.

Step Two: Work Out the Actual Saving

Say you owe $600,000, currently sitting on 6.35%, and you’ve been offered 5.95% elsewhere. That’s a 0.40% gap.

$600,000 × 0.40% = roughly $2,400 a year, or $200 a month, assuming the fees and features of both loans are broadly similar.

Step Three: Find Your Break-Even Point

Divide the switching cost by the monthly saving. In the example above: $1,200 ÷ $200 a month = six months to break even. If you’re confident you’ll still hold this loan well past that six-month mark, that’s an easy yes.

Now change one number. If the new rate is 6.05% instead of 5.95%, the gap shrinks to just 0.10%. The saving drops to roughly $50 a month, and that same $1,200 in switching costs now takes two years to recover. That can still be worthwhile if you’re planning to stay put — but if there’s a real chance you’ll sell, refinance again, or pay down a large lump sum within that window, there’s very little benefit left by the time you’d actually break even.

Two Things That Catch People Out

1. Calculate the saving after any new annual or package fee, not before it. A loan with a lower rate but a $395 annual fee can end up saving far less than it first appears.
2. Compare both loans over the same remaining term. If you have 25 years left on your current loan and a new lender sets you up on a fresh 30-year term, your monthly repayment will drop — but that’s because the debt has been stretched out again, not because the loan is genuinely cheaper.

The Term Reset Trap: A Lower Rate Can Cost You More

I mentioned the fresh 30-year term above. Here is what it can do in dollars. This is an illustrative example, not a quote, and it uses a standard principal and interest repayment.

Say you owe $400,000 with 23 years left, at 6.50%. Your repayment is about $2,796 a month. Over the 23 years you would pay roughly $371,800 in interest.

You refinance to 6.00% and accept a new 30-year term. The repayment falls to about $2,398 a month, so it feels like a win. But the interest over 30 years is roughly $463,400. That is about $91,600 more than you were on track to pay.

Now take the same 6.00% rate over the remaining 23 years. The repayment is about $2,675 a month and the total interest is roughly $338,400. That is about $33,400 less than the original loan.

Same rate, different term, and a swing of about $125,000. So ask for the new loan to match your remaining term. If you take the longer term for flexibility, keep paying the old repayment amount and the extra goes straight to the loan.

The Free Win to Try First

Before doing any of the above, there’s a step worth trying that costs nothing but a phone call: contact your current lender and ask for the team that handles customers leaving (often called retention or customer advocacy). Tell them you have a specific offer from another bank, give them the actual rate, and ask what it would take to close your loan.

Banks tend to offer their sharpest deals when they genuinely believe you’re about to leave. If they match or come close to the new rate, taking that offer and skipping the paperwork entirely is often the simplest outcome. If they only move a fraction, that’s exactly when switching starts to make real sense — and now you’ve got the maths above to confirm it.

The Actual Lesson

Refinancing isn’t something you do on a schedule — it’s something you do when the numbers genuinely support it. A five-minute calculation, and a phone call that costs nothing, will tell you far more than “it’s been a couple of years” ever will.

Related Reading

• Why Was My Home Loan Application Rejected?
• The Real Reason: The Renovation That Almost Wrecked a Refinance
• The Finance Terms Everyone’s Googling Right Now, Explained Properly

More on this topic is collected in the Finance Strategies for Australians hub.

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Written by Michael Wignall, Lending Area Manager with 30+ years in banking and home lending across the ACT, Illawarra, and Riverina. Got a question or an idea for a post? Get in touch.