What is a rate lock for a fixed rate home loan?

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A rate lock is a way for potential buyers to lock in or “lock in” a fixed home loan rate, to protect themselves from rate hikes in the lead up to a property moving in, but how it works it and how much will it cost you?




If you’re in the process of buying a home and you’ve found a home loan package that offers a great fixed interest rate, you might want peace of mind that this rate will stay in place. What if, between the time your mortgage application is processed and your home purchase paid, the interest rate increases and you end up paying more? This is where rate locking can come into play.




What is a rate lock?




A rate lock is a way for a potential property buyer to guarantee or “lock in” a fixed interest rate. A buyer who wishes to lock in a home loan rate can pay a fee to their lender to ensure that it stays the same and does not increase between the time they apply for a home loan product and the time their home purchase is set.




How does a rate lock work?




Suppose, for example, that a hypothetical home buyer applied for a home loan product with a three-year fixed interest rate of 3.4%, but by the time the purchase of their new property was settled, the three-year fixed rate rose to 3.6%. %.




If this hypothetical homebuyer had locked in their three-year fixed rate of 3.4%, they would have been guaranteed that rate for a while, even though the lender in question had increased their fixed rates in the run-up to settlement.




If, on the other hand, the mortgage lender in question had reduced their rate to 3.2% during this period, the hypothetical buyer could pay this lower rate or have to stick to the 3.4% they blocked, depending on the lender’s policy. CommBank, for example, says that for eligible policies where a borrower has paid for the rate lock, some of the trade-offs include: “If rates go down, you don’t automatically get the lower rate. However, you can ask [CommBank] to break the rate lock and return to the rates available on the funding date. Fare lock charges will not be refunded.




How long can you lock in a rate?




The standard time frame for which a lender in Australia will allow you to lock in your rate is 90 days, according to a survey of mortgage lenders on the Canstar database. However, each bank and lender that offers a rate lock will have a different period, so it is advisable to inquire before applying.




Who provides rate locks?




More than half – 59% – of the lenders offering fixed home loans for homeowners in the Canstar database offer a fixed rate lock feature on their website. All Australian banks – ANZ, Commonwealth Bank, NAB and Westpac – offer the rate lock feature on their home loans.




How much does rate lock cost?




The cost of a rate lock will generally depend on the size of your home loan, however, Canstar’s research has revealed that of the lenders in our database that offer a rate lock, the standard fee for a loan amount real estate of $500,000 would be $750. Assuming that home loan is $500,000, Canstar’s research found that the rate lock charges for each of Australia’s big four banks would be as follows.




  • ANZ: $750
  • Commonwealth Bank: $375
  • NAB: $750 (0.15% of loan amount)
  • Wetpac $500 (o.10% of loan amount)




Source: www.canstar.com.au – 14/01/2022. Based on rate lock fees for fixed homeowner loans from each of the major banks, for a loan amount of $500,000.




Is rate locking a good idea?




Generally speaking, the longer the term of the fixed mortgage, the more you could save by locking in your mortgage rate to protect yourself from rate increases. Canstar’s research considered the example of a homebuyer who takes out a hypothetical $500,000 home loan and locks in a guaranteed rate by paying the $750 median rate lock-in fee. We found that this hypothetical homebuyer would save more money by locking in a five-year rate than by locking in a one-year rate, assuming rate increases over that period.




Example 1: Locking in a one-year fixed rate




Our hypothetical homebuyer requests a home loan of $500,000 principal and interest, fixed for one year at 2.37%, and pays a rate lock fee of $750. If rates were to increase by 10 basis points, the buyer would save a total of $497 over one year, and if rates were to increase by 25 basis points, the buyer would save a total of $745 over one year. In either case, the hypothetical buyer’s savings are negated by the $750 rate lock fee, so the buyer doesn’t save any money.




Example 2: Locking in a five-year fixed rate




Our hypothetical homebuyer requests a home loan of $500,000 principal and interest, fixed for five years at 3.38%, and pays a rate lock fee of $750. If rates were to increase by 10 basis points, the buyer would save a total of $2,433 over five years, and if rates were to increase by 25 basis points, the buyer would save a total of $3,670 over five years . In either case, the hypothetical buyer saves money by paying a rate lock fee of $750.




Source: www.canstar.com.au – 10/01/2022. Average interest rates based on homeowner loans available on Canstar database available for $500,000 loan amount, 80% LVR and principal and interest repayments; excluding first-time buyer loans only. Interest calculations based on principal and interest repayments made over a total loan term of 30 years. Median rate lock fee based on $500,000 loan amount, for lenders in Canstar’s database that offer rate locks.




Are there any downsides to locking in a rate?




There are some potential downsides to be aware of before locking in a rate. In particular, it is important to consider the fact that:




  • If your lender charges a rate lock fee, you may still be charged this fee, even if your home loan application ultimately fails.
  • If you lock in your fixed rate and your lender lowers the fixed rates, you won’t necessarily be guaranteed that lower rate. So it’s important to find out about your lender’s policy to make sure this won’t happen to you.
  • You may decide to lock your rate and pay a rate lock fee, only to find that your lender’s rates stay the same until settlement day, in which case you may feel like you’ve paid the fee for nothing.




Ultimately, the longer you plan to secure a home loan, the more beneficial a rate lock could be, and the more the cost of locking your rate could be outweighed by the potential savings, assuming rates rise over the course of the year. of your loan. It’s worth bearing in mind that you won’t always benefit from having your rate locked in, and depending on the amount charged by your lender, you may decide that the additional charge isn’t worth it to you.




Can I walk away from a rate lock?




Generally speaking, it will be up to an individual lender to decide whether or not you can cancel a rate lock. As mentioned above, some lenders will still allow you to take advantage of lower rates, even if you’ve locked in your rate. However, the lender may still charge you a rate lock fee. Or, if your lender doesn’t allow it, you may be able to negotiate with them to pay an additional fee at a new, lower rate, but again, this will be at their discretion. Reading the fine print can be helpful when considering a home loan – including the Target Market Determination (TMD) and Key Information Sheet (KFS) as part of your decision making.








Cover image source: Vadym Pastukh/Shutterstock.com





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