What is a rate lock fee and how it could save you money

With rates going up each month, Australians now find themselves in a position where there can easily be multiple rate rises between when they buy a property and when they reach settlement. Due to this risk, many homeowners and house hunters are now seeking out options to help keep their home loan stable and affordable.

The Reserve Bank of Australia has increased the cash rate in four consecutive months since May. As of August 2022, it currently sits at 1.85% with many economists and market commentators speculating that there could be numerous raises to come before the end of the year.

As the main form of monetary policy used to control inflation, the cash rate has a direct influence on the movement of home loan interest rates. Australia hasn't experienced a rising interest rate environment in over a decade, so many borrowers find themselves in unfamiliar territory.

However, if you've decided on a fixed rate, then a rate lock is definitely worth knowing about.

What is a rate lock?

A rate lock is a guarantee from a lender that your interest rate will not increase or decrease for a certain period of time. One of the main attractions of a fixed rate home loan is that borrowers can set their budgets against predictable repayments.

With a rate lock, lenders are able to ensure the monthly repayments you've accounted for will not change even after a delayed fund settlement. It can also be extremely useful for those looking to refinance their current loan.

Is it right for me?

As with most things in life, it depends on your individual circumstances. It provides the peace of mind of knowing exactly how much you will have to pay over the term.

As rates are currently on the rise and have little chance of lowering anytime soon, a rate lock can provide thousands of dollars of savings over the course of the loan.

How does it actually work?

Say you have applied for a home loan with a fixed rate of 3% for the next three years, but you are concerned that during the remainder of the settlement period, rates will rise again, pushing your fixed rate up from 3% to 3.25%; a change that could potentially mean thousands more in monthly repayments over the course of the next few years.

By negotiating a rate lock (which may incur a fee of around $400 or more), you can potentially avoid an unexpected disruption to your budget and ensure that you won't receive any nasty surprises during the settlement period.

What are the drawbacks?

As mentioned, some lenders will charge a fee to rate lock, and this rate is often non-refundable.

Furthermore, if fixed rates somehow drop, you don't automatically receive the lower rate and you may need to commit to the agreed rate.

Rates could also remain unchanged, meaning you have effectively paid an additional fee with little benefit.

How do I initiate a rate lock?

Even if you have arranged for a fixed rate loan in the first place, a rate lock is not always available to all customers of every bank. If you intend on initiating a rate lock at any point during your loan period, it's important to ask about your options before signing an agreement.

Ultimately, it's important to talk with a lender or mortgage broker who can help you understand all of your options and make sure you're getting the best possible deal on your home loan. If you are interested in pursuing a rate lock, contact them directly to explore your next steps.

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