Break-even: how long until a refinance pays for itself
I have nine years left. Is there even enough time for a refinance to pay back its own costs?
There is a point in almost every home loan where the remaining term gets short enough that a good rate stops being enough. The rate can be better. The lender can be excellent. And the switch can still be a bad decision, because the money you spend getting in has fewer repayments left to earn it back.
This is what break-even measures, and it is the number to look at before any other when your loan is close to paid off.
What break-even means
Break-even is the point where the total you have saved in repayments equals the total you spent switching. Before that point, the switch has cost you money. After it, it has paid for itself and started earning.
The arithmetic is simple: take your one-off switching costs, divide by what you save in each repayment. That is the number of repayments until you break even.
| One-off costs | Saving per fortnight | Repayments to break even | Roughly |
|---|---|---|---|
| $1,000 | $200 | 5 | About 1 month |
| $8,000 | $200 | 40 | About 20 months |
Same saving, very different payback. That gap is why a lender showing you a rate without showing you the costs is only showing you half the decision.
Compare it to the term you have left
Break-even only means something relative to how long you have left to run. Take the two examples above and put them on a loan with nine years remaining:
- The $1,000 switch breaks even in about a month. You are ahead for the remaining eight years and eleven months.
- The $8,000 switch breaks even in about 20 months. Still ahead — but you have committed the money for a fifth of what is left of the loan to get there, and the benefit depends on you staying.
Now put the same two on a loan with 18 months remaining. The second one does not break even at all: you would finish paying the loan having spent $8,000 and saved less than that in interest. It was never going to work, no matter how good the rate was.
This is the most common reason a refinance fails. Owners near the end of a term chase a rate improvement and never check whether the switch costs can be repaid in the repayments that remain. A shorter break-even is better, but it has to exist at all.
When the term gets shorter, the required saving gets bigger
The same percentage rate reduction is worth less as the term runs out, because there are fewer periods left for the saving to accumulate. This is worth sitting with if you are, say, five years from the end of a 30-year loan: the loan is small in absolute terms, so even a decent absolute saving each fortnight may not beat a few thousand dollars of fees.
It also explains why some owners are better off doing nothing. If a switch only pays back over 90% of your remaining term, or not at all, staying put is a reasonable decision — not a missed opportunity.
The offsets that decide it
Costs and savings are only half of it. Two things routinely move a break-even figure a long way:
- Offsets. An offset reduces the interest-bearing balance daily. If your current offset is working for you, losing it can cost more than the switch saves. ASIC identifies offsets and redraw as features people overlook when they switch.
- LMI. If switching triggers lenders mortgage insurance, that premium goes into the one-off costs column and lengthens break-even. Moneysmart notes that LMI can increase the cost of switching enough to outweigh the savings from a lower rate.
Cashback and switching incentives have the opposite effect on the cost side, but ASIC's advice is to do the maths and confirm a cashback offer still leaves you ahead over the long term once interest and fees are counted. Treat it as money arriving today against interest you pay for years — not as a discount on the rate.
A simple rule of thumb
As a rough filter before you go further: if your break-even point lands in the first third of your remaining term, the switch probably pays. If it lands beyond that, it is genuinely marginal and you should be cautious. If there is no break-even at all, do not switch.
See your own break-even. The calculator works out the break-even point from your balance, rates, remaining term and switching costs, and tells you the net benefit over the whole term. It will say “borderline” rather than pushing you either way. You can then send the result to a licensed mortgage broker for a free review.