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Home loan interest rate lock
Avoid losing out on a great rate with a rate lock and save over the life of your loan.
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Imagine comparing home loans and finally settling on the perfect loan with the right combination of fees, features and interest rates. You fill out your application and submit it, hopeful that the rate you’ve applied for won’t change in the time it takes for your loan to settle. And then your lender raises your rate. That's where a rate lock comes in handy.
A rate lock guarantees that you will receive the loan rate under the conditions that were advertised at the moment you applied for a loan. It usually covers you from rate changes for up to 90 days until settlement date. Using a rate lock means you can avoid the surprise of receiving a rate different to the one you applied for.
Rate locks are generally only offered on fixed rate home loans.
How does a rate lock work?
A rate lock is usually applied before a fixed rate home loan settles as it sometimes may take a certain time to process your home loan application. Once you lock in the rate, depending on the lender and the rate lock available, the rate you apply for will be locked in for up to 90 days before your loan settles.
There’s usually a fee for this, and if during the rate lock period rates go down, most lenders will allow you to enjoy the lower rate - although you’ll still have to pay the rate lock fee. Some rates may be locked in at settlement, and with others it’s when the application is
Case study
Susan has been looking for her dream house for quite some time and finally has found one that suits her and her young family. Her husband and children are also thrilled with the idea of moving into a better, larger and more comfortable home that has a pool and a nice garden.
She has applied for a fixed home loan with a rate of 4.50% fixed for three years, so she can create an accurate budget during this time. She decided that it would be wise to get a rate lock as well.
Some time after submitting the application, the rate for her loan rises to 4.65%. Because of her rate lock she has avoided a rate hike of 0.15%, meaning she is now saving more money on repayments each month.
Pros and cons of a rate lock
Pros
- No surprises. You can apply for a fixed rate home loan and not worry about rates rising before your loan is approved.
- If rates drop you can still benefit. If during the rate lock period rates drop, many lenders will still allow you to benefit from the lower rates. As always, check the terms and conditions.
Cons
- Rate lock fees. Rate locks can cost between $300 to $750 and in some cases even more, so be sure to shop around, and try to get an idea of whether or not rates will be rising or falling so you know whether it’s worth the fee.
Things to consider about rate locks
When considering buying a home with a fixed rate home loan and using a rate lock, you should consult a financial planner or mortgage broker first. These kinds of professionals can tell you more about the prices on the market and will be able to tell you whether the rates might drop or rise in the short term.
You should note that even with the best experts, it’s difficult to forecast where rates might be over the course of a year or even a month.
Also keep in mind that some fixed rate home loans have a free rate lock. Free rate locks are usually shorter than rate locks with fees, generally lasting for 60 days as opposed to 90 days. Still, a free rate lock could save you hundreds of dollars and guarantee that you receive the rate you apply for.
FAQ about rate locks
How long will the rate lock last for?
You can usually lock a rate in for 90 days before your loan settles.
What loans qualify for a rate lock?
A rate lock is generally only applicable on fixed rate home loans.
What if rates go down during the rate lock period?
Most lenders will enable you to enjoy the lower rates; however you will still have to pay the rate lock fee.
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Ask an Expert
Do I need to pay rate lock if it goes over 90 days and I am unable to settle the property?
Hi Peter,
Thanks for your question.
Locking your home loan interest rate usually comes with a fee. So if you’ve applied for it, yes, you still have to pay the fee even when you’re unable to settle your loan/it goes over 90 days. Contacting your lender directly is also best so they may be able to advise as to how much and when would the fee be charged.
Cheers,
May