When Is Refinancing Worth It? Break-Even Costs and Checklist (NSW)

Picking the right home loan can be an important part of your financial management. As interest rates, property prices and personal situations change it may no longer be suitable for you to keep your current home loan, making refinancing a viable option to consider. But how do you know if refinancing will be beneficial and actually save you money?

To find the best way to refinance you’ll need to have an understanding of the existing loan, compare options and calculate costs. Refinancing may not be the right option for everyone, even if it means getting a cheaper interest rate.

When Is Refinancing Worth It?

Refinancing can be a good financial decision when the benefits are greater than the costs. Here are some common situations where it may be worth considering.

1. When You Can Get a Lower Interest Rate

One of the main reasons that people choose to refinance is to get a lower interest rate. Even if you just reduce your rate by a little bit it can make a big impact on your loan amount. Comparing refinance rates now will give you an idea of whether there is a better deal out there with a different lender.

2. When You Want Lower Monthly Repayments

If you are finding that your bills are increasing / your income has changed you might benefit from a lower repayment on your home loan. However if you extend your loan term you will be paying more interest in total. The best way to refinance would be to ensure that your repayments are affordable and will help you with your long term goals.

3. When Your Fixed Rate Period Is Ending

Many people opt for fixed rate mortgages, meaning your repayments will be consistent for a certain period. However, you may find that after your fixed term ends you will be moved onto a different variable interest rate. Comparing rates available to refinance can help you see if it is better to stay with your current lender or switch.

4. When You Want to Access Your Home Equity

If your property has gone up in value or you have paid off a large chunk of your mortgage you may have some equity in your home. You can tap into this by refinancing your property. This can be used for home improvements or any big outlays.

What Is the Break-Even Point in Mortgage Refinancing?

Understanding this calculation is one of the best ways to refinance without making a decision based only on a lower interest rate.

Here is a simple example:

Suppose you have the following refinancing costs:

• Loan discharge and administration fees: $400
• New loan application and setup fees: $600
• Valuation and other charges: $300
• Other switching costs: $200

Your total refinancing cost would be $1,500.

Now, suppose your new loan helps you save $150 per month.

Your break-even calculation would be:

Total Refinancing Costs ÷ Monthly Savings = Break-Even Period

$1,500 ÷ $150 = 10 months.

If you plan to keep the new loan for several years, refinancing may offer worthwhile savings after reaching this point.

What Costs Should You Consider When Refinancing in NSW?

Before switching your home loan, understand the fees involved. Some common refinancing costs in NSW include:

1. Loan Discharge Fees: Your current lender may charge a fee to close your existing mortgage.

2. Application Fees: Your new lender may charge a fee to process your home loan application.

3. Valuation Fees: A property valuation may be required to determine your property’s current market value.

4. Mortgage Registration Fees: NSW property registration charges may apply when registering or discharging a mortgage.

5. Break Costs: If you leave a fixed-rate loan before the fixed period ends, your lender may charge an early repayment or break cost.

6. Package Fees: Some home loans will have an annual fee to get extra inclusions/discounts.

By adding these on you can see how much you are paying to refinance and work out how long it will take to break even.

How First Homes Can Help You With Refinancing

At First Homes, we know that everyone will have their own financial requirements. Our team can help you to consider the right refinance options for you, understand what loans are available and how they work, and compare options available.

Getting advice can help you reduce your repayments, understand your current interest rate and get a better understanding of the different features available. We can also help you understand how to refinance your home loan and what to consider when you are looking at switching lenders.

Final Thoughts

Refinancing can be a great option if you can save money and the right option for your future. However, you cannot automatically assume that a lower interest rate will be the best option for your home loan. You should calculate your break even point, know all of the costs involved and compare your options.

The best way to refinance your loan is to consider how it will affect your overall finances. This includes looking at your monthly repayments, interest charges, features and long term goals.

If you are considering refinancing your home loan in NSW, First Homes can assist you with your options.