Is it worth refinancing my mortgage for one percent?

The interest charged on your home loan is one of the most significant factors affecting the overall cost of your mortgage. When it comes time to refinance, you may be wondering how much of a rate cut is enough to make going through the process worthwhile? Is it worth refinancing for even a one percent difference?

Generally speaking, the savings you could snatch up from even a one percent reduction in your home loan rate could save you hundreds, if not thousands of dollars in one year. That being said, factors such as ongoing fees may play a role in the overall savings. 

When should you refinance your home loan?

Put simply, if your home loan is no longer the best option for your financial situation or goals, and you have been paying it off for a few years, it may be time to consider refinancing.

Some of the most common reasons homeowners consider refinancing include:

• To nab a lower interest rate
• To pay less in fees
• To gain access to helpful features
• To access equity in the home
• To consolidate debts

How much of a rate cut is worth refinancing for?

If you’ve been paying off your mortgage for some time, chances are that there may be lower interest rates out there. You may have also experienced interest rate hikes that have put pressure on your household budget, or are coming to the end of a fixed rate period. 

While some people say that it’s worth refinancing for a rate cut of one percent, a reduction of even half a percentage point could help your household gain some breathing room in your budget. 

For example, a homeowner with a 25-year, $500,000 home loan is currently paying an interest rate of 6%. These are the potential savings they may see from refinancing.

Savings from refinancing with different interest rate cuts

Source: RateCity.com.au. Hypothetical example based on impact of different interest rates on a 25-year, $500,000 home loan. Does not factor in fees or rate fluctuations.

Giving yourself a one percent rate cut by refinancing could see you squirreling away an extra $3,588 in just one year. This is the equivalent of taking the family on a holiday.

Crunching the numbers for your own home loan may be as simple as using the RateCity Mortgage Repayment Calculator. Simply enter new loan option details into the calculator to see how much the mortgage repayments could be, and compare these to your current repayments.

Don’t discount the costs involved

That being said, there may be switching fees involved in your refinancing journey. Common refinancing fees and costs may include discharge fees, break fees (for leaving a fixed rate period early), application fees and Lenders Mortgage Insurance. 

This could put you back a few hundred to a few thousand dollars, depending on your current and new lender and the terms and conditions of your home loan. It may be worth calculating the break-even point of your refinance, i.e. the months it will take for the savings you earn from a lower rate to pay off these switching costs. 

If you won’t see any savings for over 12 months, it may be worth speaking to your new lender about whether they may waive any fees, or cover the cost of fees charged by your current lender.

Also, take note of any ongoing fees and charges that may come with your new home loan, such as annual fees. These could negate the benefits of a lower interest rate if they are higher than your existing fee structure. 

A good rule of thumb is to look at both the interest rate and the comparison rate of a home loan. The comparison rate includes both the advertised rate, and most of the fees involved, offering you a true cost of the loan (based on a 25-year, $150,000 home loan). 

When is it not a good idea to refinance?

It may be worth reconsidering refinancing if:

• You only have a few years left on your loan term and refinancing would extend your mortgage.
• You’re in the middle of your fixed period and cannot afford the break fees involved.
• Your property value has fallen and you find yourself in negative equity. 

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