Just when you thought you're on top of mortgage terminology we have the 'revert rate', which should always be taken into account before you sign on any dotted line.
What is a revert rate?
In simple terms, the revert rate on a home loan is the interest rate you will pay once a fixed rate term or a honeymoon interest rate period has ended.
Honeymoon (or introductory) home loan rates are less common on the market these days. You're more likely to come across a revert rate when it will automatically follow a fixed rate period.
For example, if you signed up to a fixed interest rate on your home loan for two years, when that time is up your home loan will revert to the lender's revert rate at the time.
Depending on the rate, it may drastically alter your repayments which is why it pays to be aware of the revert rate as you approach the end of any fixed rate period.
How is the revert rate set?
How the revert rate is set will depend on your lender and the loan itself. Often, the revert rate is the lender's standard variable rate at the time. This rate is dependent on the cash rate (set by the Reserve Bank of Australia), market conditions, and the lender's own policies and business decisions.
Often revert rates can be considerably higher than other variable home loan interest rates offered by the same lender and those advertised on the wider market.
How does the revert rate work?
Say you took out a $600,000 home loan in October 2021 when the RBA cash rate was at a record low (0.1%). At that time, according to RBA data, the average fixed interest rate for a new owner occupier home loan was around 2% p.a.
If you had fixed the loan for three years, you would have been paying $2,217 a month during that period.
But in those three years, the cash rate - and home loan interest rates along with them - saw the steepest rise in Australia's history.
By the end of the fixed rate period, in October 2024, the average new owner occupier variable rate was around 6.3% p.a.
Even at the average variable interest rate at the time (likely to be lower than the loan's standard variable revert rate), monthly mortgage repayments on the amount outstanding on the loan would jump to $3,344 - a 34% increase.
Why revert rates are important
If you're considering taking out a home loan with a fixed term period - and these come with benefits and drawbacks - make sure you also find out what the revert rate is and exactly when it applies.
When the fixed period has expired, the revert rate will automatically apply unless you have acted to:
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Re-fix your interest rate. This will likely not be at the same rate you were on previously so you will need to consider the new fixed rate offered as well as how long to fix for.
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Negotiate a lower variable rate with the same lender. Your lender will likely offer considerably lower variable rates to new lenders than the revert rate, and you can discuss signing up to a lower interest variable rate loan.
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Refinance with a different lender. You may choose to switch to a more competitive home loan deal since you took out your fixed rate loan. Below is a selection of some of the best rates currently available on the market:
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.79% p.a. | 5.83% p.a. | $2,931 | Principal & Interest | Variable | $0 | $530 | 90% |
| Promoted | Disclosure | ||||||||||
5.84% p.a. | 5.86% p.a. | $2,947 | Principal & Interest | Variable | $0 | $250 | 60% |
| Promoted | Disclosure | ||||||||||
5.74% p.a. | 5.65% p.a. | $2,915 | Principal & Interest | Variable | $0 | $0 | 80% | 100% owned by Commbank |
| Disclosure |
From a lender's perspective, revert rates can help them recoup some of the interest they may have foregone while the interest rate was set at a lower fixed rate. However, your lender might reach out to you with a competitive variable rate shortly before you roll off a fixed rate in a bid to retain your business.
It's important to keep track of your loan and be aware of exactly when the revert rate will apply so you can avoid paying higher interest than you need to.
Simply put, the worst thing you can do when a fixed term loan is coming to an end is nothing.
Do lenders alert you before the revert rate applies?
This will depend on the lender, but many will send correspondence well before the end of a fixed rate loan and may take the opportunity to market some of their alternative home loan offers.
If you have taken out your loan through a mortgage broker, it's highly likely they'll be monitoring your home loan and they may reach out with recommendations on how you should proceed.
In any case, it's best to give yourself adequate time to weigh up your options and research what other home loans deals are available on the market. Don't leave your decision to the last minute. You don't want to be forced to make a hasty call that doesn't fit your circumstances.
Image by Pascal Bernardon via Unsplash
Collections: Home Loan Basics Guides & Articles
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