Refinance break-even is the cleanest single metric for whether refinancing makes sense. The calculation is straightforward but several costs and timing factors materially change the result. This guide walks through the formula, three worked examples at different rate gaps and loan sizes, the hidden costs that the simple version misses, and a practical framework for using the break-even number to make the actual decision.
The break-even formula
The basic break-even formula is:
Break-even months = (Total switching costs minus cashback rebate) divided by Monthly interest saving
The monthly interest saving is calculated as: (Old rate minus New rate) divided by 12, multiplied by Current loan balance. For example, a 50 basis-point rate cut on a $700,000 loan produces a monthly saving of approximately $292.
Worked example 1: clean small refinance
Borrower has a $400,000 loan with 22 years remaining at 6.30 per cent (back-book Big 4 rate). Refinances to a non-bank at 5.85 per cent.
- Rate gap: 45 basis points
- Monthly interest saving: approximately $150
- Switching costs: $1,000
- Cashback rebate from new lender: $2,000
- Net switching cost: -$1,000 (positive cashback)
- Break-even: immediate (zero months)
- Lifetime interest saving (22 years): approximately $39,600
At immediate break-even with $39,600 of lifetime saving, this refinance is straightforwardly worth doing. The cashback alone exceeds the switching costs.
Worked example 2: typical mid-size refinance
Borrower has a $700,000 loan with 25 years remaining at 6.20 per cent. Refinances to a sharper variable at 5.79 per cent.
- Rate gap: 41 basis points
- Monthly interest saving: approximately $239
- Switching costs: $1,200
- Cashback rebate: $3,000
- Net switching cost: -$1,800 (positive cashback)
- Break-even: immediate
- Lifetime interest saving (25 years): approximately $71,700
Worked example 3: smaller rate gap, no cashback
Borrower has a $500,000 loan with 18 years remaining at 6.00 per cent. Refinances to another variable at 5.85 per cent with no cashback offer.
- Rate gap: 15 basis points
- Monthly interest saving: approximately $63
- Switching costs: $1,000
- No cashback rebate
- Net switching cost: $1,000
- Break-even: 16 months
- Lifetime interest saving (18 years): approximately $13,500
At 16-month break-even with $13,500 of lifetime saving, this refinance still makes sense but the value-per-effort is lower. If the borrower might sell or refinance again within the next 2-3 years, the marginal benefit is small.
The hidden costs the simple version misses
Five costs are often missed in the basic break-even calculation:
- Cashback claw-back clauses. Some cashback offers require the borrower to maintain the loan for a defined period (typically 2-3 years). Refinancing again before then triggers a claw-back of the original cashback.
- Rate reset after introductory period. Some refinance products feature an attractive headline rate for 12-24 months that resets higher afterwards. The break-even calculated on the introductory rate is misleading.
- Package fees from year two. Some packaged products have annual fees that take effect from year two. Factor in the annual fee through the break-even period if applicable.
- Break costs on fixed-rate loans. If refinancing out of a fixed loan, break costs can be material if wholesale rates have fallen materially since the fix was taken. Get the break-cost calculation from the current lender before assuming the standard switching costs apply.
- Opportunity cost of the offset balance. If the current loan has a meaningful offset balance, the effective interest rate is lower than the headline. The refinance rate comparison should be against the effective rate, not the headline.
The break-even decision framework
Use the break-even months together with the remaining loan term and the lifetime saving:
- Break-even under 12 months with material lifetime saving: Refinance straightforwardly worth doing.
- Break-even 12-24 months with material lifetime saving: Worth doing if you plan to hold the loan for the medium term.
- Break-even 24-36 months with material lifetime saving: Worth doing if you definitely plan to hold the loan and property for the long term.
- Break-even beyond 36 months: Reconsider. The combination of long break-even and the always-possible future life event (sale, move, refinance again) typically does not justify the effort.
- Negative break-even (cashback exceeds switching costs): Refinance immediately, the cashback alone is the benefit.
Running the numbers for your file
The fastest way to get an accurate break-even number for your specific file is to engage a broker who can quote across multiple lenders and provide the actual switching costs, cashback offers and rate comparison for your loan size and remaining term. The 5-minute estimate is useful for screening; the broker quote is the actionable number.
Frequently asked questions
What is the refinance break-even formula?
Break-even months = total switching costs divided by monthly interest saving. If switching costs $1,000 and the rate cut saves you $250 per month, break-even is 4 months. After break-even, every month of saving is net benefit over the remaining loan term.
How long should break-even be for refinance to make sense?
For most borrowers, break-even under 24 months is genuinely good; under 12 months is excellent. The longer the remaining loan term, the longer break-even can be while still producing meaningful lifetime savings. A 36-month break-even on a 25-year remaining loan still produces material savings; a 36-month break-even on a 5-year remaining loan rarely does.
What costs go into the break-even calculation?
Switching costs include: discharge fee from current lender ($150-400), legal/settlement fees on new loan ($200-500), valuation fee ($0-500, often waived), title and mortgage registration fees ($300 total), application/establishment fees on new loan ($0-700). Total typical: $650-1,450. Cashback rebates from the new lender ($1,500-4,000) are subtracted from costs.
Should I include the rate-cycle risk in my break-even calculation?
For variable-rate refinance, the rate saving is based on current rates and can move with the rate cycle. If both old and new rates move together, the absolute saving is preserved but the relative saving is the same. For fixed-rate refinance, the saving is locked for the fixed term but break costs apply if you exit early.
Does the break-even change if I make extra repayments?
Yes. The interest saving compounds over a longer period if you make extra repayments to repay the loan faster. The monthly saving figure used in break-even assumes the standard repayment schedule; faster repayment reduces the absolute monthly saving but the rate gap saving still applies on each remaining dollar of balance.
Is break-even the right way to evaluate refinance?
Break-even is the simplest and most useful single metric, but it does not capture every consideration. The total interest saving over the remaining loan term is the larger headline number. The break-even months tells you how quickly the refinance pays for itself; the total saving tells you how much value the refinance produces over the loan life.
Can I refinance multiple times to keep capturing rate cuts?
In principle yes; in practice the break-even maths becomes harder each time because the remaining loan term shortens. Most borrowers refinance every 3-5 years to capture material rate movements. More frequent refinancing rarely produces enough total saving to justify the cumulative switching costs.
Does break-even include the opportunity cost of my time?
Not in the standard calculation. A refinance application typically takes 4-8 hours of borrower time across application, document gathering, and settlement. For most borrowers the time cost is modest relative to the lifetime saving. For high-hourly-value professionals, factoring time cost into the comparison is reasonable.