Imagine comparing home loans and finally finding the perfect loan with a great interest rate. You fill out your application and submit it. But while you're waiting for settlement to take place, the lender lifts rates on its home loans. By the time you get the keys to your place, your home loan has a higher rate. That's where a rate lock comes in handy.
How does a home loan rate lock work?
When you buy a property you need to get your home loan application sorted quickly. But there will be a delay between your loan approval and the actual settlement day, when you take possession of your home and start repaying your loan.
During this time, your lender could increase interest rates on its loans. If you pay a small fee you get a rate lock. This means you get the rate you applied for even if it jumps up during settlement.
Lenders offer rate locks on fixed rate loans, not variable rate loans. It's not always available, so check before you apply for a loan.
Example: Susan opts for a rate lock
Susan has been looking for her dream house for quite some time and finally has found one that suits her and her young family. She takes out a $450,000 loan over 30 years.
She has applied for a fixed home loan with a rate of 2.50% for three years. This means Susan can budget for her repayments accurately for 3 whole years. Settlement is 60 days, and Susan is worried that interest rates will rise soon. So she opts for a rate lock, with a $100 fee.
Some time after submitting the application, the rate for her loan rises to 2.75%. Because of her rate lock she has avoided a rate hike of 0.25%. In dollar terms this is a big saving. Susan's monthly repayments at 2.50% are $1,778. At 2.75% she would be stuck paying $1,837 a month. Over 3 years, that $400 rate lock fee has saved her $2,124 in interest charges.
Risks and benefits of locking in your rate
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. This is a lot of money to pay, especially if rates don't rise during settlement.
More questions about rate locks
According to analysis of all the rate lock fees in Finder's database, the average home loan rate lock fee is $460.
You can usually lock a rate in for 90 days before your loan settles.
A rate lock is generally only applicable on fixed rate home loans.
Your lender will hopefully put you on the lower rate, although you may have to ask them to do so. And you'll probably still have to pay the rate lock fee.
Richard Whitten is a money editor at Finder, and has been covering home loans, property and personal finance for 6+ years. He has written for Yahoo Finance, Money Magazine and Homely; and has appeared on various radio shows nationwide. He holds a Certificate IV in mortgage broking and finance (RG 206), a Tier 1 Generic Knowledge certification and a Tier 2 General Advice Deposit Products (RG 146) certification. See full bio
Richard's expertise
Richard has written 562 Finder guides across topics including:
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Do I need to pay rate lock if it goes over 90 days and I am unable to settle the property?
Finder
MayMarch 12, 2018Finder
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
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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