What is a home loan rate lock and how does it work?

A fixed rate home loan provides a sense of certainty, letting you know that your home loan rate will stay the same for a set period of time. This can be especially appealing at times like these, when cost of living is biting and rates look set to rise through the year.

What happens, though, if you apply for a home loan at a fixed rate that you like, but your lender decides to raise rates before the loan settles? Will you be stuck paying more than you’d bargained for? A home loan rate lock can be a way around this, but it doesn’t come for free.

What is a rate lock and how does it work?

A rate lock is a feature of a home loan that lets you guarantee or ‘lock in’ a fixed rate, to protect you against rate rises while buying a property.

Normally, when you apply for a fixed rate loan, then the rate that you get is the one that applies on the day your loan settles. This can be disheartening, and can be a strain on the budget, but a rate lock can protect you.

Say, for example, that you apply for a $600,000 home loan with a fixed interest rate of 6.00%, but by the time your purchase of your new property settles, the fixed rate has risen to 6.25%.

If you’d locked in your rate, then you’d be guaranteed the 6.00% rate, even though your lender’s rates have gone up.

How long can you lock a rate for?

The standard amount of time that a lender in Australia will allow you to lock your rate is 90 days. At the time of writing, ANZ, Commonwealth Bank, NAB and Westpac – the nation’s big four banks  – all offer 90-day rate locks to customers.

Some will offer more time though. For example, at the time of writing, Bank of Queensland offers 100 days. If you’re interested, then it’s worthwhile to ask your chosen lender if and for how long they are willing to provide a rate lock for you.

How much does rate lock cost?

Some banks will charge a flat fee for a rate lock, and some will charge a percentage of the home loan amount. To give you an idea, at the time of writing, here’s what the big four banks charge, according to their websites:

• ANZ: $750 per $1 million in lending
• CommBank: $750
• NAB: 0.15% of loan amount
• Westpac: 0.10% of loan amount

Can you save with a rate lock?

Whether or not you can save with a rate lock will depend on your personal needs, circumstances and budget, but consider the following example:

You find a home you like, and you plan to take out a $600,000 principal and interest home loan at a fixed 6.00% rate. By the time you settle, though, your lender has raised rates by 25 basis points, to 6.25%.

According to Canstar’s mortgage calculator, over a 30-year term at a rate of 6.00%, your monthly repayments would be approximately $3,597. At a rate of 6.25% for the same loan, your monthly repayment would jump to $3,694.

That’s $97 more per month, and $1,164 a year. Say that your lender charges a flat fee of $750 for a rate lock – within the first year, your rate lock would have paid for itself.

Are there downsides to locking in a rate?

There are some potential drawbacks to be wary of before you lock in a rate. In particular, it is important to consider the fact that:

• Rate lock fees tend to be non-refundable.
• If rates stay the same or go down during the rate lock period, or if your lender does not approve your application, you’ll still pay the fee.
• If you change your mind during a rate lock period, and find a more favourable rate that you want to switch to, you’ll be charged another fee for locking that rate in.
• There’s not a great deal of flexibility with a rate lock, and if you decide to go with another lender offering a better rate, you won’t get your money back.