Set up the current and proposed loans

A lower advertised rate is only the first line of a refinance decision

Refinancing replaces or changes a loan. A lower interest rate can reduce cost, but discharge, application, valuation, legal, government and fixed-rate break charges can delay or erase the saving. Ongoing package fees and a longer new term can also make a superficially cheaper payment more expensive over time.

Moneysmart recommends asking the current lender for a better deal before switching and comparing the full costs. A retention rate reduction can avoid many external refinancing costs. If the existing loan is fixed, the break cost can be substantial and usually requires a current lender quote rather than an online guess.

The calculator models principal-and-interest repayments at constant rates. It does not include offset balances, redraw, interest-only periods, split loans, stepped rates, cashback clawbacks, loyalty requirements, annual fee timing, lender’s mortgage insurance or tax consequences for an investment loan.

How this refinance comparison avoids the repayment trap

Required monthly repayments use the standard amortising-loan formula for each balance, annual rate and term. When switching costs are paid from cash, the new principal starts at the existing balance. When they are financed, gross switching costs are added to the new loan and attract interest. Cashback reduces the modelled economic switching cost but is not treated as an immediate principal reduction.

For the selected comparison period, the model simulates each loan month by month. It totals interest and monthly fees and tracks the remaining principal. The refinance cost adds gross switching costs and subtracts entered cashback. Economic saving is current interest and fees minus new interest, fees and net switching cost.

Principal repayments are not counted as a cost in that economic comparison because they reduce debt and build equity. They remain visible in the monthly repayment and ending-balance outputs. This matters when the new term is longer: the payment can fall while the balance after five years is higher.

Lifetime figures run each loan to its entered term and add monthly fees. The proposed result also includes switching costs less cashback. Constant rates make this a scenario, not a forecast.

Switching costs to obtain in writing

Cashback is not a free interest-rate reduction. Check eligibility, payment timing, minimum loan, required account, retention period and clawback. Compare the product without cashback as well as with it. A higher rate over many years can outweigh a one-off incentive.

What the break-even month means

The calculator starts the new path with the net switching cost: gross switching charges less cashback. It then compares accumulated monthly interest and fees. Break-even is the first month when cumulative cost of keeping the current loan is at least cumulative cost of refinancing.

If no break-even occurs within the shorter entered loan horizon, the output says it is not reached. That does not mean switching can never help under another rate path, and it does not value features. It means the entered constant-rate cost saving did not recover the entered net costs in the modelled time.

Break-even matters when the borrower may sell, move, refinance again or pay off the loan soon. A 30-month break-even is weak if the property is likely to be sold in a year. Conversely, a very short break-even still needs a serviceability, valuation and feature review.

Worked example: $600,000 with 25 years remaining

Assume a $600,000 current balance at 6.40% with 25 years left and a $10 monthly fee. The proposal is 5.80% over 25 years with the same monthly fee. Switching costs total $2,500 and expected cashback is $2,000, leaving a $500 net economic switching cost when paid from cash.

The new required repayment is lower because the rate falls and the term is unchanged. Over a five-year comparison, interest and fee savings are measured against that $500 net cost. Ending balances show whether the new loan has also repaid more principal.

If the new term is changed to 30 years, the required payment falls further, but the lifetime output can deteriorate because interest is paid for longer. Borrowers who want cash-flow relief can compare the minimum payment with keeping the old repayment amount, but this page does not automatically assume extra repayments.

Rates and fees do not value every feature

An offset account can reduce interest when it holds cash, but package fees, eligibility and access rules matter. Redraw can work differently and may have tax consequences for investment borrowing. Fixed and variable splits change rate risk and break-cost exposure.

Repayment flexibility, customer service, branch access, portability, construction features and hardship support can matter even when they are difficult to price. Compare the comparison rate for a standardised indication, then read the product documents and model the way the household will actually use features.

Approval depends on income, expenses, debts, credit history, property valuation and lender policy. A lower market rate does not guarantee the borrower can refinance, and multiple applications can affect the credit file.

Before submitting an application

Request a current payout and fixed-break quote, confirm remaining term, and reconcile the current rate and fees. Ask the new lender for the interest rate, comparison rate, loan term, repayment, all upfront and ongoing fees, cashback conditions, valuation policy and whether costs join the loan.

Test the new rate at least two percentage points higher using the stress field. Check the household budget with the stressed repayment and with loss of income or higher living costs. Do not rely on the approval maximum as the affordable amount.

After settlement, verify that the old loan and linked package are closed as intended, direct debits are updated, cashback conditions are met and the new repayment frequency is correct. Keep discharge and settlement statements.