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What is a revert rate?
Looking at a home loan's revert rate will help you understand what your repayments will look like further down the track.
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When you have a fixed home loan, or a variable one with an introductory rate, the loan will also have a revert rate. This is the interest rate that your loan will switch (or revert) to once the initial fixed or introductory rate period ends. A revert rate is usually higher than the initial rate, though not always.
How does it work?
A revert rate is an interest rate that fixed and introductory rate home loans reset to at the end of a predetermined term. Lenders often use a higher revert rate as a way of recouping the cost of a great deal they might offer for a certain period of time.
For instance, you might have been awarded a very low rate on your home loan for the first couple of years. During this period, your lender makes a slimmer profit on the net interest margin. This describes the difference between the interest rate you’ve been given, and the rate the bank pays to fund your loan.
Obviously, a bank wants to maximise the net interest margin of its loan book. By resetting your home loan to a higher revert rate, they widen the interest margin they make on your mortgage.
What sort of home loans carry a revert rate?
There are generally two different types of home loan products that revert rates apply to:
- Fixed rate loans
- Introductory rate loans
A fixed rate home loan means your interest rate won’t change for a predetermined period of time, generally between one and five years. This can work to the bank’s advantage if market rates fall during the fixed rate period, but works to your advantage if rates rise. A revert rate is one of the ways a bank mitigates this risk.
At the end of the fixed rate period, if you take no action, your loan will automatically roll over to a variable revert rate. If you’re not paying attention, this can come as a nasty shock.
An introductory rate home loan, is a variable rate home loan that offers a discount off the lender’s standard variable rate for a predetermined period of time, usually one or two years. At the end of this period, your loan could reset to the bank’s standard variable rate or to a higher revert rate.
Again, if you don’t take any action, you could end up surprised by a much higher monthly repayment.
How much higher is the revert rate from the rate I’m paying now?
The difference between the rate you’re paying and the revert rate can be pretty significant. For instance, a search of finder.com.au’s database as of November 2017 revealed the average difference between a one-year fixed rate and the revert rate is 0.69%. The average difference between a three-year fixed rate and the revert rate is 0.66%.
Suppose you were on a three-year fixed rate of 4.00% for a $500,000 loan. How would the higher revert rate affect your repayments?
- Original rate: 4.00%
- Monthly repayment: $2,387.
- Revert rate: 4.66%
- New monthly repayment: $2,581
That's an extra $194 per month. If you make repayments for 10 years at this rate you'll end up paying an extra $23,280 on your home loan.
What can I do about a high rate?
The best thing you can do to protect yourself from a high revert rate is to negotiate with your lender as the end of your fixed rate or introductory rate period approaches. You may be offered the opportunity to fix your rate for another term, or be able to settle on a discounted rate.
If your lender isn’t willing to negotiate, it’s time to look at refinancing. There is a plethora of great home loan deals on the market, so it’s important to compare loans as the end of your fixed or introductory period approaches.
Keep in mind, that moving to a new home loan will come with some costs. You can use the calculator on this page to crunch the numbers and make sure you’ll come out ahead if you refinance.
If you’ve checked the figures and decided to refinance, you can compare loans in the table near the top of this page. Or, if you want to learn more about the refinancing process, you can read our comprehensive refinancing guide.
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