What is a Rate Lock?
Basically this is when the interest rate you applied for is literally locked in prior to settlement.
Why is this potentially important?
Because it is quite common for you to suddenly find that your home loan deal becomes not-so-great when your interest rates go up before your loan is advanced.
How does rate lock work?
People who think they’ve found a great home loan package can potentially find themselves paying a different interest rate than the one they applied for. A rate lock ensures you’re not affected if rates move in the time it takes for your loan to be approved.
A few things to note:
- If interest rates happen to fall, most lenders will let you have the lower rate – but be careful, some don’t. It’s important to clarify this.
- When the rate lock begins exactly will depend on the lender.
- You’ll generally have to pay the lender a fee – either a set fee or a percentage based on the amount you’re borrowing (up to 0.20% of the loan amount).
Who can apply for a rate lock?
- New home loan applicants: Only those applying for a fixed rate home loan.
- Those refinancing: If you are looking to re-finance your existing loan, you can apply for a rate lock-in.
How long will the rate lock be active?
Again, this depends on the lender.
If your loan application is particularly complicated, we recommend locking the rate for as long as possible. This way you are covered in the event that approval takes longer than anticipated and rates rise in the meantime.
We also suggest having all your documentation ready to go – so you can potentially submit the loan as soon as you’ve locked your rate in.
Disadvantages of 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 pitfalls as well. Remember that:
- Fees may apply … and may not be refundable if your loan gets rejected.
- If you have locked in and the rates then drop – you may still be charged the original, higher, rate by some lenders.
However, because interest rates are constantly in flux, we recommend the protection of a rate lock.
At OzBroker, we’re happy to help you find the lender with the rate lock that suits you best – and ensure you’re safe from interest rate hikes. We can also help you look for lenders who charge minimal – or no – fees.