Did you know that you could find a great home loan deal only to have your interest rate hiked just before settlement?
It’s more common than people realise.
The solution is rate lock!
What Is Rate Lock?
- It is an option you can choose when applying for a fixed rate loan.
- The lender will charge a rate lock fee (up to 0.20% of the loan amount).
- The interest rate that you applied for is locked in so you are not affected if rates move before your loan is advanced.
Did you know that some lenders have free 60 day rate lock?
How does it work?
Most people shop around for a great loan package with low interest rates, before they commit to a mortgage. Yet they don’t know that they actually get the interest rate on offer when their loan is advanced, not the rate at the time that they apply.
For example, you see that ABC Bank has a fixed rate home loan at 5%. Before settlement, this rate could rise to 5.3% or fall to 4.7%. If you didn’t choose to rate lock your loan then you will receive the interest rate on the day that your loan is advanced.
With rate lock, if the rate dropped to 4.7% then most lenders would allow you to have the lower rate, but if rates increased to 5.3% then you would be protected and would pay only 5%.
Be careful as some lenders do not allow you to benefit if the interest rate falls before settlement, they only protect you if the rate increases. So choose your lender carefully.
Here’s a general calculation of how Rate Lock works:
Let’s assume that a borrower is currently applying for a $600,000 home loan, with a 3-year fixed-rate at an interest of 2.29%.
As the interest rate increases to 2.69%, the borrower would have been better off paying an assumed rate lock fee of $375 while locking the rate at 2.29%.
|Loan size||Cost of 3-year loan (2.29%) + rate lock fee||Cost of 3-year loan (2.69%)||Difference|
When will the rate lock begin?
This depends on the lender that you apply with. Some lenders will lock the rate:
- From the date that you apply for a loan.
- From the date that you pay the rate lock fee.
- At the time of approval.
If you do not choose the right lender you may end up paying a high interest rate! Not all lenders work the same way.
For this reason, you will need the help of an expert mortgage broker who can help you find a lender that will not increase your rate after you apply.
Call us on 1300 889 743 or enquire online today to find out what we can do for you.
How long will the rate lock be in effect?
Each bank has a different time period for rate lock. Some banks will lock the rate in for 60 days, others for three months.
If your loan application is complicated, it is advisable that you lock your rate in for the maximum possible period.
This way you are covered in the event that approval takes longer than anticipated and rates rise in the meantime.
Is there a rate lock fee?
Most lenders will charge you a fee for the rate lock feature. The actual fee amount varies from lender to lender.
Some charge a set fee, whilst others calculate the fee as a percentage based on the amount that you are borrowing.
Below are the fees from some of our lenders:
- Lender 1: $750 for loans up to $1,000,000 fixed for up to 5 years.
- Lender 2: $450 or 0.15% of the loan amount, whichever is greater.
- Lender 3: 0.15% of the loan amount.
- Lender 4: Free.
Free rate lock on your loan!
While some banks will charge you expensive fees to lock your rate in, we know lenders that will do this for free!
Secure your low rate for a period of up to 60 days by speaking to us today on 1300 889 743 or enquire online and our mortgage brokers will get back to you.
Rate locks can be complicated and it’s all about the detail, so contact our expert team.
Should I Lock My Rate?
Tips for locking in your rate
- Do your research: Speak to all the banks and lenders to make sure that you get the best rate lock feature for an extended period with no fees.
- Have all your documents ready: This way you can quickly submit the loan application after you have locked your rate in. This minimises the possibility that the rate lock period will lapse and you may end up paying a higher market interest rate.
- Communicate with your mortgage broker: To ensure your application is lodged with the bank quickly.
- Check the term of the rate lock-in: So that you can make sure your application is on its way to being approved before your rate lock lapses.
Why does my fixed term matter?
The rate lock fee is the same for a one year fixed rate and a five year fixed rate.
Yet a 0.1% change in rate before settlement will cost you 0.1% with a one year fixed rate and 0.5% with a five year fixed rate.
That’s why rate lock isn’t as beneficial for short term fixed rates. While for a three or five year fixed rate it is highly recommended.
Disadvantages of a rate lock
Although a rate lock option is great for borrowers who want the added certainty of having a stable fixed interest rate, there are some downfalls as well:
- Some lenders charge fees to rate lock.
- If you have locked in and the rates then drop, you may be charged the higher (original) rate by some lenders.
- The rate lock fee may not be refundable if your loan gets declined.
Want to make sure you don’t pay any fees and have access to the lowest interest rates? Enquire online or contact us on 1300 889 743 and our mortgage brokers can help you get the best rate lock feature from one of the major banks.
Speak to us today!
Who can rate lock?
A rate lock-in is available to:
- New home loan applicants: If you are about to apply for a fixed rate home loan, you can choose the rate lock option as part of your loan package.
- Refinancing: If you are looking to re-finance your existing loan, you can apply for a rate lock-in.
As rates are constantly changing, we recommend this feature for all new home loan applicants.
New home loan applicants are also eligible for some great discounts, cheap introductory rates and low interest rates, especially if taking out a 3 year fixed rate home loan.
It’s always hard to pick the right time to lock in your rate. However, a rate lock is highly recommended if interest rates are increasing.
If rates are going up, then you must give us all of your supporting documents as soon as possible. This way we can lock in a competitive rate for you before they go through the roof.
Most lenders lock in your rate from the date that they receive your application from us. However if your application is incomplete then we can’t lodge it with the lender.
How do you know if rates are increasing?
If a couple of banks have just increased their fixed interest rates then this is a good indication that the other banks are under pressure from higher funding costs and may make similar changes. In these cases you must act quickly to lodge your application.
Rate lock or rate quote?
These are two very different things!
- A rate lock is an agreement to lock in a specified rate.
- A rate quote is generally provided by the banks when your loan has been approved. This is just a quote of what the interest will be. It is not a commitment by the lender to offer you that rate.
As both are entirely different, it is best that you clarify exactly what it is you are entering into.
Get your rate lock in writing!
In most cases, you will be exposed to a rate rise unless you get the formal rate lock approval in writing.
A rate quote or a verbal agreement is not actually legally binding. Seek a ‘loan-commitment letter’ from your bank to ensure that you are actually locking in your low rate.
How can I get cheap mortgage interest rates?
Want to lock in the lowest rate? You will need a mortgage broker!
If one bank makes an announcement that they are putting their fixed rates up, then it is likely that the other banks will follow.
As your mortgage broker, we keep an eye on the banks’ announcements and have the most up to date rate pricing available.
This means that we can give you the information you need to make an informed decision on whether you should rate lock, as well as getting you the best possible rates.
What if interest rates drop?
If you have locked in a fixed interest rate and then rates fall before your loan is advanced, can you still get the reduced rate?
This is a common question that our customers ask us.
The devil is in the detail! Some banks will not offer the lower rate and will only protect you from interest rate rises.
We know lenders that will offer you that reduced interest rate, even at settlement!
Want to rate lock with a competitive lender that can offer you reduced interest rates?
Can I rate lock a 10 year loan?
This is because a small change in their cost of funds before the loan is advanced could make the loan completely unprofitable for them, even though they are charging a rate lock fee.
What does a letter of commitment contain?
Generally, a loan commitment letter from your bank should include:
- Borrower’s name
- Name of the lender
- Loan amount
- Interest rate
- Rate lock-in fee (if applicable)
- Lock-in start date
- Lock-in expiration date
Make sure that you understand all the terms of your rate lock. Read the small print so you don’t end up losing out on your low interest rate due to missing or misunderstanding the finer details.
Our mortgage brokers can do this for you! Speak to us on 1300 889 743 or enquire online today!
Will the rate lock fee be refunded if I don’t get approval?
If you have paid a rate lock fee, be aware that some lenders will not refund this fee. This means that you may end up paying for a service that you did not use.
Speak to a mortgage broker!
If you are looking to apply for a home loan and want to secure the lowest interest rates possible, please speak to us on 1300 889 743 or enquire online.
We have the knowledge relating to fixed rate home loans that most other mortgage brokers lack.
Call us today to find out how we can get your loan approved with a lender that offers the cheapest mortgage rates around!