If you have found the perfect property to meet your needs along with a competitive fixed home loan rate, you may consider opting to ‘lock-in’ the fixed rate to provide extra assurance against rising interest rates. Here we’ll take a look at what exactly a rate lock is, alongside pros and cons to locking in your home loan interest rate.
While fixed home loan rates provide security ensuring your repayments and interest remain consistent throughout the life of the loan, like any financial product they are subject to market movement. This means the home loan rates offered by lenders are subject to change up until your home loan has reached settlement.
A rate lock is a feature of a fixed rate home loan that can guarantee a fixed interest rate for your chosen fixed rate term and protect you against rate rises. With a rate lock, if the rate drops most lenders would allow you to have the lower rate, but if rates increased you would be protected as you are ‘locked-in’ to receive the lower rate.
Rate locking is an option that can be only applied to a fixed rate home loan. Some lenders may not offer a rate locking feature, however here at loans.com.au we offer customers the option to lock in the advertised fixed home loan rate for 90 days at a cost of $350.
Check out our fixed rate home loan options for owner occupiers.
Rate lock example
Bob has found his dream home and a lender offered him a competitive fixed interest rate of 5.00% p.a.
He applies in July when this rate is fresh, but doesn’t actually settle on the loan until August, by which point the fixed rate has jumped to 5.50% p.a.
Being that his home loan is $600,000 on a 30-year term, this results in a difference of $185.80 per month.
Bob weighs up the options and figures it would have been worth paying the $350 rate lock as it could have paid for itself in two months.
Locking in a fixed rate can be achieved any time before settlement, however these conditions will vary across lenders. Some lenders will initiate a rate lock from the date you apply for the feature, while others will wait until the rate locking fee is paid before initiating. It’s important to clarify with your lender when the rate lock commences to ensure that you do not end up paying a higher interest rate than what could be otherwise avoided.
Pros
- Added security in the event interest rates rise.
- Certainty of what repayments will be during the fixed period.
- If your loan application takes longer, such as if you have multiple or unconventional streams of income, rate locking could prove useful in that it shields you from rate rises.
- If you need time to find and secure the perfect property, locking in a rate that covers the mortgage process from pre-approval to unconditional approval to settlement will again shield you from rate rises.
Cons
- There is less flexibility when locking in a fixed rate home loan.
- With a rate lock, there is no guarantee rates will rise in the time before settlement, meaning a borrower could pay the fee unnecessarily.
- If your property search comes to no avail, taking out a rate lock too soon means it could expire before settlement takes place.
To lock in one of our competitive fixed rate home loans or to simply discuss your home loan options, speak to one of our lending specialists today.
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