Don’t get stung by a high revert rate: Mozo research reveals fixed home loan trap

Fixed rate home loans can be an enticing option for borrowers. They provide security against rate hikes and certainty about fitting monthly repayments into the family budget. But some borrowers may be unprepared for the potentially high revert rates that await them at the end of their fixed term.

Fixed rate home loans usually come with a fixed term from one to five years long, or on some options, as long as seven or even ten years. While the rate is locked in for this period, it then reverts back to a variable rate option. These revert rates automatically kick in unless you negotiate an alternative with your lender, and they can make a huge difference to your monthly repayments.

If this is all news to you, you might be in for a shock. Research from Mozo has shed some light on just how steep revert rates can be for borrowers caught unaware. 

High rates in store for borrowers

We compared 262 fixed rate loans for owner occupiers paying principal and interest and found that borrowers can generally expect to see sizeable rate increases once their fixed term rolls over to a variable revert rate. Here’s a breakdown of the average increases:

• For one year fixed rates you’ll be paying an average of 43 basis points more at the end of the period, with the average rate increasing from 4.02% p.a. to 4.45% p.a.
• For two year fixed rates you’ll be paying an average of 52 basis points more at the end of the period, with the average rate increasing from 3.93% p.a. to 4.45% p.a.
• For three year fixed rates you’ll be paying an average of 46 basis points more at the end of the period, with the average rate increasing from 3.99% p.a. to 4.45% p.a.

Even more concerning, in many cases, revert rates were at least 1% higher than the fixed rate offer. Of the fixed rate loans we compared:

• 40 of the one-year fixed rate loans reverted to a rate at least 1% higher
• 52 two-year fixed rate loans reverted to a rate at least 1% higher
• 40 three-year fixed rate loans reverted to a rate at least 1% higher

A 1% increase may not sound like much, but put in real terms, it can add up very quickly. For example, adding 1% to the interest rate on a $400,000 mortgage over 30 years, taking it from 4.00% to 5.00%, would add $247 to a borrower's’ monthly repayment. That’s nearly $3,000 extra paid in interest in one year.

Suncorp, Bank of Queensland, HSBC, RAMS and Arab Bank Australia were among the lenders with the biggest jumps, all increasing by more than 1.50% p.a.

On the other side of the coin, rates from lenders like AMP, Well Home Loans, Kogan Money, SCU and State Custodians actually dropped after a five year fixed period, some by as much as 1.10% p.a. 

What steps should you take to avoid a nasty revert rate?

Sudden hikes can leave you struggling under the weight of your new repayments, so you’ll need to have a plan in place to avoid finding yourself in such a position. If you’re coming off a fixed rate mortgage and a high revert rate is on the horizon, there are a few things you can do.

The first is to get your bank or lender on the phone and see if you can arrive at a better deal. If you’re lucky, you might be able to lock in another fixed term or negotiate to have your loan switched over to an offer with a lower rate.

If that doesn’t prove fruitful, there’s always the option to refinance and find a better deal with a different lender. That’s why it pays to look at the other home loans that are available as your fixed rate term nears its end.

If refinancing looks like your best bet, be sure to check out the options available below.