The Reserve Bank of Australia has a term for it: the "loyalty tax." Banks routinely offer new customers rates 0.5–1.5% lower than they give existing borrowers who haven't questioned their loan in two or three years. On a $700,000 mortgage, a 1% rate gap costs you roughly $7,000 per year — paid directly to your lender's bottom line.
This guide runs the real numbers on how much refinancing actually saves — including the costs that reduce your net saving — so you can make an informed decision rather than a guess.
The Core Calculation: Rate Gap × Loan Balance
The primary saving from refinancing comes from the interest rate gap between your current rate and the new rate. The maths is straightforward:
Annual interest saving formula
Annual saving = Loan balance × Rate gap
Example: $650,000 loan balance × 0.75% rate gap = $4,875/year = $406/month
The rate gap on your specific loan depends on when you took out the loan and whether you have negotiated with your lender since. Borrowers who took out loans in 2021–2022 at variable rates and have not refinanced are often sitting on rates 0.8–1.4% higher than what new customers are being offered today.
Worked Examples: Three Common Sydney Scenarios
Scenario 1 — Western Sydney family, $600,000 remaining
$3,720
Year 1 saving
$18,600
5-year saving
$93,000
25-year saving
Scenario 2 — Parramatta unit owner, $450,000 remaining
$3,612
Year 1 saving
$18,060
5-year saving
$90,300
25-year saving
Scenario 3 — Liverpool upgrader, $820,000 remaining
$5,784
Year 1 saving
$28,920
5-year saving
$144,600
25-year saving
These are interest-only saving estimates
The figures above assume the same remaining loan term and P&I repayments. Your actual saving depends on your remaining balance, whether you choose a shorter or longer new term, offset account usage, and any cashback offers from the new lender. Use the refinancing calculator on our site to model your exact numbers.
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The Costs That Reduce Your Net Saving
The gross saving figures above are compelling — but refinancing is not free. The costs determine your break-even timeline and whether refinancing makes sense given how long you plan to hold the new loan.
Standard refinancing costs (variable to variable)
Typical costs — variable rate to variable rate refinance
Fixed rate break costs — the wildcard
If you are on a fixed rate loan, break costs can be substantial — sometimes thousands of dollars. Fixed rate break costs are calculated based on the difference between your fixed rate and the current wholesale rate for the remaining fixed period. A 2-year fixed loan with 18 months remaining in a falling rate environment could have break costs of $5,000–$15,000+.
Rule of thumb: If your break costs exceed 12 months of monthly savings, wait until the fixed period ends before refinancing. If your savings payback the break costs within 6–8 months, it may still make sense to break early.
LMI — the hidden cost for high-LVR refinancers
If your current loan-to-value ratio is above 80%, refinancing to a new lender will trigger LMI again — even if you paid LMI when you originally purchased. LMI on an $800,000 property at 88% LVR can cost $12,000–$18,000. At that cost, the break-even on a $400/month saving is 30–45 months — potentially still worthwhile, but the maths needs to be done carefully. Alternatively, staying with your current lender and negotiating a rate reduction avoids LMI entirely.
Cashback Offers — Free Money With a Catch
Many lenders offer cashback incentives for refinancers — typically $2,000–$4,000 credited to your account at settlement. These can accelerate your break-even dramatically. But cashbacks come with conditions:
- Minimum loan balance requirements (usually $250,000+)
- Clawback periods — if you refinance away within 12–24 months, you repay the cashback
- The lender offering the highest cashback is not always the one with the best rate
Net the cashback against your costs and treat it as a one-time saving — the ongoing rate is what matters for the long-term calculation.
The Break-Even Calculation
Once you know your monthly saving and total costs, the break-even is simple:
Break-even formula
Break-even (months) = Total costs ÷ Monthly saving
$1,200 costs ÷ $310/mo
= 3.9 months ✅
$8,000 break cost ÷ $310/mo
= 25.8 months ⚠️
$14,000 LMI ÷ $400/mo
= 35 months — model carefully
When Refinancing Does NOT Make Sense
Not every refinance is worth doing — and a good broker will tell you this honestly. Refinancing typically does not make sense when:
- You plan to sell within the break-even period. If you are moving in 12 months and the break-even is 14 months, you will be worse off.
- Fixed rate break costs are too high. Run the numbers before assuming breaking a fixed rate is worthwhile.
- Your LVR is above 80% and you would pay LMI again. Unless the rate saving is very large and you plan to hold for 3+ years, the LMI cost can negate the benefit.
- The rate gap is under 0.25%. Below this threshold, the savings are minimal and the administrative effort rarely justifies it.
- Your financial situation has changed. Job loss, new business, reduced income — these can mean you no longer qualify for competitive rates, and a failed application damages your credit file.
For a broader framework on whether now is the right time to refinance your specific situation, see our guide on whether you should refinance in 2026. If you are considering fixed vs variable, the fixed vs variable rate comparison covers the current rate environment in detail.
How to Maximise Your Saving
- Compare broadly, apply once. A broker compares wide lender panel and identifies the best rate for your profile before a single application is lodged — avoiding the score damage of multiple hard enquiries.
- Negotiate with your current lender first. Call your lender, quote a competitor rate, and ask for a match. Some lenders will drop 0.2–0.4% to retain you — no refinancing costs required.
- Match your remaining loan term. Refinancing to a new 30-year term lowers your repayment but restarts amortisation — you pay significantly more total interest. Match your remaining term for maximum lifetime saving.
- Consider offset over redraw. When switching lenders, the structure of your new loan matters. An offset account provides more flexibility than a redraw facility and can amplify interest savings further.
- Check your LMI waiver eligibility. Certain professions (doctors, lawyers, accountants, engineers) qualify for LMI waivers — meaning you can refinance at above 80% LVR without paying LMI again.
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