What is the revert rate in a fixed rate home loan?

The revert rate is the interest rate that your mortgage will automatically switch over to once you reach the end of a fixed rate term. It’s easy to experience bill shock if a revert rate catches you by surprise, but there are ways to minimise the impact they make on your household budget.

How do revert rates work?

Revert rates are mainly encountered if you have a fixed rate home loan. Fixing your home loan interest rate lets you lock in your mortgage repayment amounts for a limited time. No matter what the Reserve Bank of Australia (RBA) decides or how the economic conditions change, you’ll still be making the same mortgage repayments for the duration of the fixed term. This can give some borrowers an important sense of security.

However, all good things must come to an end. Unlike in some other countries around the world where you can fix your interest rate for decades, Australia has relative short fixed rate terms, often lasting somewhere between one and five years. Once you reach the end of the fixed rate term, your home loan will automatically switch – or “revert” – to a variable interest rate, known as the revert rate.

Revert rates also apply to introductory rate home loans, where the lender offers a discounted interest rate for a limited time at the start of a home loan term. Sometimes called a “honeymoon rate”, this discount is typically as an incentive to encourage borrowers to choose that lender. At the end of the promotional period, the discount will no longer apply, and you’ll likely revert to the lender’s variable interest rate. 

What is my revert rate?

It’s not always easy to find out your home loan revert rate far in advance, as banks regularly adjust their variable interest rates to better suit fluctuations in the market. In some cases, your revert rate may be your bank’s standard variable interest rate for a home loan of your size.

As you approach the end of your home loan’s fixed rate term, the lender may contact you to alert you that you’ll soon be switching to their revert rate. You may also be able to take the initiative and contact the lender yourself in advance to get an idea of the revert rate you may be switching to, and use a home loan repayment calculator to work out how it may affect your household budget.

Are revert rates expensive?

The cost of a revert rate will depend on what’s been happening in the Australian economy during your fixed rate term. If variable interest rates have been rising, it’s possible your home loan’s revert rate could be significantly higher than your previous fixed rate, leading to a sharp increase in your repayment costs.

However, if interest rates have fallen during your loan term, it’s possible you could even switch to a lower interest rate. This could let you enjoy a welcome discount on your home loan, or let you keep making repayments at the previous amount so that the extra money can go towards paying off your loan sooner, potentially saving you money in interest charges.

For example, during the COVID-19 pandemic, the RBA lowered the national cash rate to the record low of 0.1%. Many borrowers took this opportunity to lock in low fixed rates on their home loans, so they could enjoy low home loan repayments for a few years. However, with the RBA choosing to rapidly raise the cash rate in the following years, many borrowers faced what became known as the fixed rate mortgage cliff as they reverted to much higher variable rates at the end of their fixed rate terms.

How to prepare for a revert rate

Once you’ve found out what your new revert rate will be at the end of your fixed rate term, you can make some calculations to estimate what our new mortgage repayments will be, keeping in mind that these calculations will only be accurate until the lender adjusts the variable rate. Using these figures, you can work out if you can comfortably afford the repayments on your household budget, given your income and expenses.

If it looks like you may struggle with your new higher repayments, or if you’d just like a better deal for your changing financial situation, there are a few options you could consider, including:

Re-fix the loan

You may be able to contact your bank to extend your fixed rate period, which would let you keep enjoying stable repayments for longer. However, this may not be available in all cases, as banks adjust their interest rates to best suit the economic conditions – your previous interest rate may no longer be available. Also, not every lender will offer the option to re-fix a home loan interest rate, or allow you to do so more than once.

Ask for a discount

Calling up your bank to negotiate your home loan interest rate may be more effective than you expect. You may be surprised by how much a bank or mortgage lender may be willing to compromise to keep your business as a customer. But they’re unlikely to offer you a better deal of their own accord – you’ll need to ask.

Refinance

If your lender isn’t willing to discount your home loan interest rate, you can compare mortgage deals from other lenders and switch over to the provider with the offer that will best suit your needs. You may need to pay some fees when your end one loan and start a new one, but the savings offered by a lower interest rate could see your quickly break even.

Just keep in mind that if you refinance your loan while you’re still in the fixed rate period, you may need to pay break costs. Depending on how long is still left to run on the fixed rate period and how much interest rates have changed in the intervening years, the more the break costs could potentially be. 

Sell

If there’s no simple way for you to manage your new repayments on the lender’s revert rate, you may need to consider selling your property. While this may not be ideal, it means you can avoid having a default on your credit history, which would affect your credit score and make it harder to borrow money in the future.

If you’re not sure which option may be the best choice for you, you could consider getting advice from a mortgage broker or financial adviser.

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