Why is the revert rate in a fixed rate mortgage so important?

A ‘revert rate’ is particularly important if you're thinking of taking out a fixed-rate home loan - or your current home loan is in a fixed-rate period. 

See also: How to choose between a fixed-rate and a variable-rate home loan

Revert rate meaning

The ‘revert rate’ is the interest rate you will pay once your fixed-rate term is up.

Say you’re on a two-year fixed rate with your home loan. 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 will see your mortgage repayments increase, although the opposite can also apply - you could get lucky and revert to a lower rate.

When else might a revert rate apply?

Revert rates can also apply on introductory-rate home loans. Introductory-rate home loans (quite rare in Australia these days) generally offer attractively low rates that apply at the start of a loan term for a limited period. After this introductory period lapses, the interest rate switches to the loan’s revert rate. 

Does switching to a revert rate change your loan term?

Generally speaking, switching to a revert rate will not change the term of your loan overall. Instead, your repayments will be recalculated based on the current balance and current term of the loan. To change the term length, you’d need to refinance or renegotiate with your lender.

How do you know what your revert rate will be?

What your revert rate will be depends on the loan product and your lender. Often it will simply be the lender's standard variable rate (more on this below).

Generally, in the run-in to the fixed loan period ending, you may be able to choose to switch to another variable or fixed rate the lender is offering at that time. (More on other options below.)

What is the difference between a standard variable rate and a basic variable rate?

A standard variable rate is typically a lender's default variable rate, sometimes called a 'reference rate'. It's the one many borrowers automatically switch to after a fixed-rate period ends or after the expiry of a discount period.

This should not be confused with a basic variable home loan rate. A basic home loan is a common name for a stripped-down mortgage product, designed to provide a no-frills loan, generally without any added home loan features. A basic variable home loan rate is generally considerably lower than the lender's standard variable rate.

Revert rate case study

Sometimes switching to a revert rate can mean a major jump in home loan repayments.

Let's say you've been paying a 4.25% p.a. three-year fixed rate to start you off on a $700,000 home loan taken out over a 30-year term.

During the fixed period, your repayments would be $3,443 per month.

At the end of the fixed period, the lender's revert rate is 6.95% p.a. which would be paid on the remaining loan balance of $663, 040.

This would see your repayments jump to $4,539 a month - an extra $1,096.

All calculations via Savings.com.au's Mortgage Repayment Calculator  

Why revert rates are important

If you’re looking at a fixed- or introductory-rate home loan, it’s wise to check the revert rate too because it may significantly affect your repayments down the line.

Bear in mind, it's difficult to know what the exact revert rate will be at the end of your fixed-rate period. Revert rates are variable rates that generally move in line with variations in the official cash rate which can be difficult to foresee. 

In the example above, repayments shot up by more than $1,000 a month from the fixed to the revert rate - around a 25% increase - which could prove a major strain on some household budgets.

If you’re considering a fixed-rate mortgage, it's wise to check how the revert rate will be calculated before going ahead with the loan.

But this also needs to be balanced against the possible benefits of fixing your loan in the first place. 

See also: How to choose between a fixed-rate or a variable-rate home loan

Other options when your fixed term is ending

If you’re currently on a fixed rate and concerned about considerably higher repayments when you switch to the revert rate, there are some other options:

1. Refinance

You may be able to avoid paying a high revert rate by refinancing your loan, either through the same lender (see more on this below) or with a different lender.

You’ll need to go through the home loan application process again if you decide to switch to a different lender. 

Refinancing the loan to a competitive rate that's available on the market should be weighed up against the costs involved and how much you stand to save over the course of the loan.

See also: What is refinancing a home loan and what are the pros and cons?

It's worth noting if you refinance before the fixed term concludes, you’ll likely have to pay a break cost, which will generally be higher the more time remains on your fixed term.

You will need to do your calculations to determine whether the costs of breaking your existing loan and refinancing will be recouped through switching to a different loan product.

2. Renegotiate

But you may not need to go through the refinancing process to switch to a better rate than the revert rate.

It's wise to get in touch with your current lender before the expiry of your fixed-rate period and see what they can do for you.

It's worth mentioning that you’re considering refinancing elsewhere because of their high revert rate and you might find your lender is more flexible than you would have thought.

Many borrowers successfully negotiate their rate lower than the lender's advertised revert rate, so it’s definitely worth asking, or getting a mortgage broker negotiate on your behalf.