Rate lock is a way for you to take advantage of a low fixed rate when you apply for a loan up to the time you settle on the loan. It is handy, especially in times when interest rates are rising. This is because a rate lock is an extra feature that lets you hedge against rates rising before your house purchase is settled.
In this article, we’ll explain what a rate lock is, how it works, and why you should consider it.
What is a rate lock?
When you apply for a home loan and you choose a fixed rate, the interest rate may change between the application date and settlement. A higher fixed rate at settlement can result in higher repayments and can be an unpleasant surprise for homebuyers. A rate lock is a feature that can guarantee your fixed interest rate for your chosen fixed rate term. This will protect you against rate rises between the time you apply for the rate lock with the bank and the date your loan settles.
The rate lock can apply to both owner-occupied and investment fixed-rate home loan products. With most banks, you can only apply for the rate lock feature when you’ve found a home and seeking formal approval or when you are refinancing your mortgage to a new lender.
How does rate lock work?
Let’s say you’ve found a house and exchanged contracts. You’ve chosen a 2-year fixed rate but you’re worried that the fixed rate may rise by the time your loan settles. The settlement period varies depending on the state. In NSW, the settlement period is 42 days and in Victoria, the settlement period is usually 30 to 90 days. You can lock in the 2-year fixed rate today and the rate lock feature will guarantee that your loan will get the fixed rate up to the date of loan funding. During this time, your interest rate will not be affected by any rate increases. If you settle within the rate lock period, your loan will fund at the locked-in rate.
Once you complete and submit the rate lock form, the bank will process your request. Remember that the rate lock is only good for a specified period and with most lenders, for up to 90 days.
How much are rate lock fees?
The rate lock fee varies between lenders. Some banks charge between .15% to .20% of the loan amount. Other banks charge a flat fee ranging from $500 to $1,000 irrespective of the loan size. Keep in mind that this fee is non-refundable, even if your application is unsuccessful.
When should I consider a rate lock?
Rate locks tend to be most appealing when fixed interest rates are predicted to increase. For example, if some banks have started increasing their interest rates and others are predicted to follow suit, it may be wise to consider locking in the fixed rate. It is also usually more beneficial for a longer fixed term as there is more the borrower stands to save over the life of the loan. Your broker can help you calculate the potential savings and determine whether it is a good time to opt for a rate lock.
It is important to keep in mind that if a lender lowers its interest rate and you have opted in for a rate lock, you are not necessarily guaranteed the lower rate. Each lender has a different policy around this so it’s important that you do your due diligence and find out the bank’s policy when you need to cancel the rate lock.
How to prepare for the fixed rate cliff
How a rate lock helped our first home buyers secure a competitive rate on their home loan?
Thelma and Louise are a young couple who want to buy their first home. They had been saving up for years and finally found their dream home in the Northwest suburb. They applied for a home loan and were pre-approved, but they were worried about interest rates rising before they closed on the loan.
As their mortgage broker, we recommended they consider a rate lock, which would protect them from any potential interest rate increases during the loan approval process. Thelma and Louise were hesitant at first, as they weren’t sure if it was worth the additional cost.
We explained that a rate lock would give them peace of mind and protect them from any unexpected changes in interest rates. The couple decided to proceed with the rate lock, and we help the secure a rate lock agreement with the bank.
A few weeks later, interest rates began to rise. Thelma and Louise were relieved that they had opted for a rate lock, as their interest rate remained the same. They were able to close on their home with the agreed-upon interest rate, and their monthly mortgage payments were affordable and predictable.
Over the next few years, interest rates continued to rise, but Jack and Jill were protected by their rate lock. They were grateful they had taken our advice, as they were able to save thousands of dollars in interest payments over the life of their loan.
We’re here to help you
If you’re considering a rate lock, speak to your broker to understand the pros and cons and calculate your potential savings. It is also important to read the terms and conditions of the home loan you are considering, including the Target Market Determination (TMD) and Key Facts Sheet (KFS). Your broker can help you highlight key points for consideration and how they may impact you.
Maria Papa is a senior property and finance expert specialising in home loans, investment loans, self-employed loans, alt doc loans, car loans, personal loans, and loan protection. She has offices in Sydney, Melbourne, and Manila. If you have questions, you can call Maria at 0430 144 008 or email her at mpapa@maverickfinance.com.au.
Disclaimer: Your full financial situation will need to be reviewed prior to acceptance of any offer or product.