Refinance break-even calculation
Lower rates sound appealing, but refinancing always comes with costs. The key question is how long it takes for the interest savings from a new loan to outweigh the fees required to get it. That’s your refinance break-even point.
What to include in your comparison
Refinancing involves more than just a new rate. Include every cost that affects your out-of-pocket total to get a true picture of savings.
- Application fee: charged by the new lender to process your loan.
- Discharge fee: cost to close your old loan and release the mortgage title.
- Valuation fee: sometimes required for the new lender to assess your property’s current value.
- Lenders Mortgage Insurance (LMI): may apply again if your new loan exceeds 80% of property value.
- Ongoing fees: monthly or annual package fees that may differ between lenders.
Add these up for the total cost of refinancing. Your goal is to find how many months of lower repayments it takes to recoup those fees.
Break-even months formula
Here’s the quick way to estimate your break-even point:
Break-even months = Refinance costs ÷ (Old repayment − New repayment)
This tells you how many months of lower repayments it will take to recover the upfront costs. After that point, you’re genuinely saving.
Example: You spend $3,000 on fees to refinance from 6.5% to 5.9%, saving $120 per month. Break-even = 3,000 ÷ 120 = 25 months. So if you plan to keep the property longer than two years, refinancing could pay off.
Example with side-by-side comparison
| Item | Current loan | New loan |
|---|---|---|
| Loan balance | $500,000 | $500,000 |
| Interest rate | 6.5% | 5.9% |
| Term remaining | 25 years | 25 years |
| Monthly repayment | $3,377 | $3,180 |
| Monthly saving | – | $197 |
| Upfront refinance costs | – | $3,000 |
| Break-even point | – | ~15 months |
After about 15 months, you’ve covered the refinance costs. Every month after that, the lower interest rate becomes a net gain.
Model it yourself
To see your own numbers:
- Open the Loan Repayment Calculator.
- Run two scenarios side by side — your current rate and your proposed new rate.
- Compare total interest paid and monthly repayments.
- Divide total refinancing costs by your monthly savings to find your break-even month.
This approach works for homeowners and investors deciding whether to switch lenders or fix their rate.