What is an interest rate lock?
Fixed rate home loans explained
Learn everything you need to know about fixed rate home loans with Selling Houses Australia host, Andrew Winter.
Andrew Winter
Home Loans
Video Transcript
Hi, I’m Andrew Winter, host of Selling Houses Australia.
With years of property market experience under my belt I know for a fact that stability can
be invaluable when it’s needed.
And if you’re looking for a bit of stability and security when it comes to your home loan,
then a fixed rate home loan could be just the ticket.
A fixed rate loan is, well, a home loan with a fixed rate.
But what that means is that while you are on a fixed rate home loan, your interest rate
won’t change by even a fraction of a percent.
This is absolutely perfect for anyone who wants their home loan repayments to stay where they are.
They won’t go up, they won’t go down, your home loan repayments will stay the exact
same until your fixed rate period ends.
Now a fixed rate period will typically only be between one and five years, so it’s important
to remember that a fixed rate isn’t forever.
it’s more of a buffer, to give you a few years of financial surety in which you won’t
have to worry about interest rate changes or anything like that.
While we’re here, it’s worth mentioning that fixed rate home loans generally don’t
allow for much in the way of additional repayments you could even be charged a fee for doing so.
You may be able to find a fixed rate home loan with an offset account attached, but
beware of potential pitfalls – maybe the fixed rate period is only for a year, or maybe
it’s a partial offset instead of a 100% offset.
Lenders may also choose to charge a “break fee” if you pay out or refinance your home
loan within the fixed term – and these fees can be pretty hefty!
So, if you’re the type who wants to really get ahead on your home loan or you might want
to refinance or move in the near future, a fixed rate home loan may not match your financial priorities.
But they can be perfect for a wide range of borrowers, including first home buyers, refinancers looking
for a period of stability, and honestly anyone who loves being able to
budget everything down to the last dollar with absolute certainty.
Oh, I nearly forgot to mention!
At the end of the fixed rate period, you’ll usually be moved onto your lender’s revert
rate which might not be the cheapest interest rate out there!
This makes it crucial to shop around and compare your options before your fixed rate period ends.
So, what are you waiting for? If you want to buy a home you’ll want to
compare your home loans with Compare the Market. As soon as possible!
Expert tips for considering a home loan interest rate lock
Our General Manager of Money, Stephen Zeller, thinks a rate lock option can be an invaluable tool for fixed-rate borrowers – if understood and used properly. With that in mind, he has some tips for prospective homebuyers considering locking their rate in.
Stephen Zeller
General Manager – Money
Don’t forget the lock fee!
Locking your rate in could potentially save you money in interest repayments if rates were to go up ahead of your settlement date. That being said, paying for a rate lock may not always be worth your while. Rate locks are typically calculated as a small percentage of the overall loan value – if your home loan is on the larger side, a rate lock could cost you more than it’ll save you.
Consider the interest rate environment
Rate locks are designed to protect the borrower against interest rates going up, but if rates go down after you’ve locked yours in, you’ll have paid money for the privilege of losing more money. With this in mind, you may want to do some research into recent rate movements and do your best to figure out which direction rates might be headed in next. That way, you can make a more informed decision about whether a rate lock is appropriate for you or not.
We’re here to help!
If you’re not sure whether a fixed rate lock could be appropriate for you, our Home Loan Specialists are on-hand and ready to answer any questions you might have about rate locks and how they work. You can either give us a call on 1800 737 434 or book in for a video call with one of our lending specialists today!
Interest rate locks explained
What is a rate lock and how do they work?
An interest rate lock is a home loan feature available to borrowers taking out new fixed rate home loans which lets them lock in the interest rate available to them at the point of home loan approval, instead of being saddled with whatever rate is on offer once their home loan settles.
This doesn’t necessarily sound like a big deal, but you might have to wait up to 90 days between home loan approval and settlement – and interest rates could potentially spike by quite a bit in that time. So, by locking in a lower rate once your home loan is approved, you could potentially save on interest over your fixed rate period.
You have to apply for a rate lock on top of your home loan application, and some lenders recommend you request a rate lock ASAP, which usually means at the start of the application process. However, you’ll typically be able to request a rate lock at any point before drawdown.If your request to lock your rate is approved, you’ll secure the relevant fixed rate on offer at the time. This rate will then be secured until your home loan is finalised and drawn down on, when it’ll be locked in as your home loan interest rate.
Note that the interest rate you lock in as part of your rate lock agreement will only apply for the duration of your fixed rate term, rather than your entire loan term. With this in mind, you may want to consider how much you’d realistically save over the entire life of the loan, and whether you think a rate lock would be worth it.
Do rate locks expire?
If you’re approved for a rate lock, it will be for a set period of time – typically between 30 and 90 days. If that rate lock period elapses and your home loan hasn’t been drawn down on, your rate lock may expire.
In that case, you’ll be given whatever fixed rate is on offer at the point your home loan is settled, which could be higher than your original locked-in rate. So, if you’re going to pay for a rate lock, you’ll want to be confident that your loan will settle before the rate lock expires.
Is there a fee for locking my interest rate?
Interest rate lock fees generally hover between 0.1% and 0.2% of the total loan amount. Some lenders charge a set rate lock fee; depending on the size of the set fee and the size of your home loan, this may be cheaper than paying a percentage of your loan.
Depending on the lender you’re applying with, you may need to pay your rate lock fee upfront. However, some lenders may simply deduct the fee from your home loan account once the loan settles.
Can I cancel a rate lock?
You’ll typically be able to cancel a rate lock request before your new loan settles and is drawn down on, or if your home loan doesn’t proceed to settlement. However, it’s important you know that rate lock fees are usually non-refundable.
How do I apply to lock my rate?
Most lenders will typically have a form borrowers can fill out to apply for a rate lock. You should flag your intent to apply for a rate lock with your lender as soon as possible to avoid any potential delays.
Could a rate lock benefit you?
Should I lock in my interest rate?
The decision to lock your interest rate or not should be made based on your current financial circumstances, objectives and priorities. If you’re planning on taking out a fixed rate home loan and believe a rate lock could save you money in interest, it could be an option worth considering.
When should I consider locking my rate?
The necessity of a rate lock is tied to the current interest rate environment, and what rate movements have looked like lately. If rates have been rising and are pegged to climb further, rate locks may be of use to fixed-rate borrowers hoping to lock in a lower interest rate.
Who’s eligible for a rate lock?
Generally speaking, any borrower who plans on taking out a fixed rate home loan should be eligible to apply for and receive a rate lock. However, some lenders may not offer rate lock features, or may have lending criteria restricting the fixed rate loans eligible for a rate lock.
If you think it’s likely you’ll want to apply for a rate lock as part of your home loan application, you’ll want to flag this with the lender early, in case they don’t offer them or you’re otherwise unable to lock your rate with the lender in question.
What if interest rates drop after I’ve locked my rate?
If interest rates drop after you’ve applied and paid to lock your rate, you’ll have to decide whether to cancel the rate lock (and forfeit your rate lock fee) to get a better rate when your loan settles or leave the rate lock in place.
However, considering the fact that you can’t get your rate lock fee back regardless, you may be better off cutting your losses and cancelling your rate lock. At least that way, you’ll probably save money in interest once your home loan repayments start!
Pros and cons of locking your rate
If you’re considering a rate lock, here’s an overview of the general pros and cons to potentially help you with your decision.
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Meet our home loans expert, Stephen Zeller
Stephen has more than 30 years of experience in the financial services industry and holds a Certificate IV in Finance and Mortgage Broking. He’s also a member of both the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) and the Mortgage and Finance Association of Australia (MFAA).
Stephen leads our team of Mortgage Brokers, and reviews and contributes to Compare the Market’s banking-related content to ensure it’s as helpful and empowering as possible for our readers.