Why some Aussies are paying thousands to lock in their mortgage rate

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Around 50% of people are fixing their home loans, according to figures from Commonwealth Bank, but is paying a rate lock fee prior to settlement worth the money?

What is a rate lock fee?

A new home loan usually takes up to six weeks to settle (although in South Australia it is often shorter), while refinance applications can take anywhere between one and three months to settle.

fixed rate lock fees

A rate lock fee can be paid by a customer to lock in the fixed rate on offer at the time of application (or any time before settlement), protecting them against any rate increases prior to settlement.

The lock typically lasts for around 90 days, but this can differ between lenders.

How much is a rate lock fee?

Rate lock fees run into the hundreds and sometimes even thousands, depending on your lender.

Some lenders do not charge to lock the fixed-rate, including UBank and Tic Toc.

Big bank fixed-rate lock fees

Fee on $300k home loan

Fee on $500k home loan

Fee on $1m home loan

CBA

$375

$375

$375

Westpac

$300

$500

$1,000

NAB

$450

$750

$1,500

ANZ

$750

$750

$750

Note: CBA and ANZ charge a flat fee to rate lock, while Westpac charges 0.1% of the loan balance and NAB charges 0.15%.

Is it worth the extra cost? 

RateCity analysis shows on a $500,000 loan with a three-year fixed rate at 1.95%, if the rate rises to 2.05% before the application is processed, borrowers will pay an extra $1463 over this term if they don't lock in their rate.

In this scenario, the borrower would have been better off if they paid the typical rate-lock fee of $500.

Of course, it only makes financial sense to pay the fee if rates are increased before settlement.

And for that we need a crystal ball. But that doesn't stop you making an informed decision.

For example, this year, CBA has hiked its three-year fixed rate once by 0.05%, and its four-year rate twice by 0.05% - 0.2% each time, while Westpac has only hiked its three-year rates once by 0.1% and its four-year rate once by 0.3%.

"There's no question fixed rates are, by and large, on the rise, particularly when it comes to terms of three years and over," says RateCity research director Sally Tindall.

Still, there's no guarantee your rate will go up in the time it takes to settle your loan.

"At the end of the day, paying a rate lock fee is a gamble either way, but there is one thing it can provide for certain and that's peace of mind. If you're someone who's likely to fret about rates rising, every day until your loan settles then it might be worth the money."

Tindall also suggests asking your bank if they'll waive the fee.

Right now, CBA is offering a 50% discount off their rate lock fee - a great example of the fact that these types of fees aren't set in stone.

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David Thornton is a journalist at Money magazine and is one of the hosts of the Friends With Money podcast. He previously worked at Your Money, covering market news as producer of Trading Day Live. Before that, he covered business and finance news at The Constant Investor. David holds a Masters of International Relations from the University of Melbourne.