A ‘revert rate’ is another home loan lending term you might come across that can be initially confusing. If you’ve only just mastered the difference between fixed and variable, it might be a bit of a bummer to find out there are still more adjectives that can go in front of the word ‘rate’ that you need to know about. Thankfully, revert rates are a super simple concept, but it’s important nevertheless to ensure you understand what they are, as it might be pretty significant for your home loan.
Revert rate meaning
The ‘revert rate’ is the interest rate that you will pay once your fixed-rate term is up. Say you’re on a two-year fixed rate. After those two years are up, your home loan will automatically ‘revert' to whatever the revert rate is at the time. If this is higher than your fixed rate, you could see your mortgage repayments increase, although the opposite also applies - you could get lucky and ‘revert’ to a lower rate.
Generally speaking, going back to the revert rate will not change the term length of your loan. Instead, your repayments will be recalculated based on the current term - you’d need to refinance or renegotiate with your lender to alter the term length.
Revert rates also apply on introductory-rate home loans. Introductory-rate home loans (quite rare in Australia these days) generally offer attractively low variable rates that apply at the start of a loan term for a limited period. After this introductory period elapses, the interest rate switches to the loan’s revert rate.
What is the revert rate?
What your revert rate will be depends on your product and your lender. It is often simply the lender's standard variable rate, so the rate itself is generally dependent on how variable rates are tracking.
This can sometimes mean a major jump in mortgage repayments. For example, in May 2021, the average fixed rate for new owner-occupier (OO) lending (for fixed terms less than or equal to three years) was 1.95% p.a. By May ‘24, the average OO rate had reached 6.30% p.a. Imagine you had $500,000 outstanding on your loan (with 25 years remaining) and you fixed at 1.95% p.a for three years, locking your repayments at $1,896.4 per month. By the time the fixed term expires, there would be about $406,839 of the principal outstanding (all these figures calculated using the Savings.com.au’s home loan repayment calculator). If the loan then reverted to a 6.30% p.a variable rate (with 22 years now remaining), repayments would shoot up to about $2,851.6 each month.
Why revert rates are important
If you’re looking at a fixed- or introductory-rate home loan, it’s important to pay attention to the revert rate because it might significantly affect your repayments down the line. In the example above, repayments shot up by more than $1,000 each month from the fixed to the revert rate, a 50% increase, which could mean a major strain on household budgets. In 2023, there were major concerns that an avalanche of mortgages with expiring Covid-era fixed rates would force thousands of Australian households into financial hardship, although this didn’t materialise on a major scale.
If you’re considering a fixed-rate mortgage, you should ensure you check how the revert rate will be calculated before going ahead with the loan. Generally it will be dependant on variable rates, so you won’t know for certain what the rate will be until the expiry of your fixed-rate. However, if current variable rates with your lender are well above competitors, it might be a sign that when your fixed-rate expires, your repayments could shoot up well above what you would otherwise be paying.
Of course, many people in this sort of situation still come out ahead. For example, those coming off fixed rates in 2023 likely made significant savings during the fixed period - and if they chose to make overpayments into their mortgage with the extra capital, they could well have made big progress paying it down. The important thing is to ensure you take the revert rate into account when making this kind of decision.
Read more: The lucky ones who fixed
Other options when your fixed term is ending
If you’re currently on a fixed rate, and concerned about what your repayments will become when it expires and you switch over to the revert rate, you could have a couple of alternative options.
Refinance
You might be able to avoid paying the high revert rate by refinancing to a different lender. You’ll need to go through the home loan application process again, and demonstrate that you’ll be able to pay off the new loan, but if you successfully refinance to a lower rate it could mean significant savings. Keep in mind that if you refinance before the fixed term concludes, you’ll likely have to pay a break cost, which will generally be larger the more time is remaining on the fixed term. You’ll need to figure out what the break cost will be, and factor that in when working out whether refinancing will be worth it.
Renegotiate
In some cases you might not even need to actually go through with the refinance. If you get in touch with your current lender and explain that you’re considering refinancing elsewhere because of the high revert rate, you might find your lender is more flexible than you would have thought. Many borrowers successfully negotiate their rate to be lower than the lender's advertised rate, so it’s worth asking, or having a mortgage broker ask on your behalf.
Disclaimers
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.
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