What is a rate lock for a fixed rate home loan?

A rate lock is a way for prospective home buyers to set or ‘lock in’ a fixed home loan rate, to protect themselves from rate rises in the period before settling on a property, but how does it work, and how much will it cost you?

With the Reserve Bank of Australia (RBA) recently raising the cash rate and looking set to raise it further, many Aussie home owners and aspiring home buyers may be concerned about the effect this will have on interest rates. Banks and lenders have already begun raising their home loan rates in line with the RBA, and rate hikes seem set to continue.

If you are in the process of buying a property right now and you have found a fixed rate home loan package that offers a favourable interest rate, you may be wondering what will happen if your lender raises their rate between the time your home loan application is processed and the time your purchase of the home settles.

Could you end up paying more thanks to a rate rise, and what can you do to give yourself some peace of mind in this situation? This is where rate lock can come in.

What is a rate lock?

A rate lock is a way for a property buyer to guarantee or ‘lock in’ a fixed interest rate. Said buyer can pay a fee to their lender to ensure that their rate does not increase between when they apply for a home loan product and when the property purchase is settled.

How does a rate lock work?

Say, for example, that a hypothetical home buyer applied for a home loan product with a three-year fixed interest rate of 3.4%, but by the time their purchase of their new property settled, the three-year fixed rate had risen to 3.6%.

If this hypothetical home buyer had locked in their three-year fixed 3.4% rate, then they would have been guaranteed this rate for a period of time, even if the lender in question put their fixed rates up in the period before settlement.

If, on the other hand, the home loan lender in question had put their rate down to 3.2% in this time period, then the hypothetical home buyer might pay this lower rate, or might have to stick with the 3.4% they locked in, depending on the lender’s policy. CommBank, for example, says that for eligible policies where a borrower has paid for rate lock, some of the trade offs include: “If rates go down, you don’t automatically receive the lower rate. However, you can ask [CommBank] to break the rate lock and revert to the rates available on the funding date. The rate lock fee will not be refunded.”

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, based on a survey of the home loan lenders on Canstar’s database. Each bank and lender who offers rate lock will have a different period, though, so it is advisable to enquire before applying.

Who provides rate locks?

More than half – 59% – of lenders offering fixed home loans for owner occupiers on Canstar’s database provide a fixed rate lock feature on their website. All of Australia’s banks – ANZ, Commonwealth Bank, NAB and Westpac – offer the rate lock feature on their home loans.

How much does rate lock cost?

The cost of a rate lock will typically depend on the size of your home loan, however, based on a survey of lenders’ websites undertaken in April 2022, the rate lock fee that each of the big four banks would charge for a home loan of $500,000 is as follows:

• ANZ: $750
• CommBank: $750
• NAB: $750 (0.15% of loan amount)
• Westpac $500 (o.10% of loan amount)

Source: Lenders’ websites as at 29/04/2022. Based on the rate lock fees for owner occupier fixed loans from each of the major banks, for a loan amount of $500,000.

Is a rate lock a good idea?

In general terms, the longer the fixed home loan period is, the more you might stand to save by locking your home loan rate in to protect yourself from rate rises. Canstar research considered the example of a homebuyer taking out a hypothetical home loan of $500,000 and locking in a guaranteed rate by paying the median rate lock fee of $750. We found that this hypothetical homebuyer stood to save more money by locking in a five-year rate than by locking in a one-year rate, assuming rate increases over this time.

Example one: Locking in a one-year fixed rate

Our hypothetical homebuyer applies for a $500,000 principal and interest home loan, fixed for one year at 2.37%, and pays a $750 rate lock fee. If rates were to go up by 10 basis points, the buyer would save a total of $497 over one year, and if rates were to go up by 25 basis points, the buyer would save a total of $745 over one year. In both instances, the savings made by the hypothetical buyer are cancelled out by the $750 rate lock fee, so the buyer does not save any money.

Example two: Locking in a five-year fixed rate

Our hypothetical homebuyer applies for a $500,000 principal and interest home loan, fixed for five years at 3.38%, and pays a $750 rate lock fee. If rates were to go up by 10 basis points, the buyer would save a total of $2,433 over five years, and if rates were to go up by 25 basis points, the buyer would save a total of $3,670 over five years. In  both instances, the hypothetical buyer saves money by paying a $750 rate lock fee.

Source: www.canstar.com.au – 10/01/2022. Average interest rates based on owner occupier loans available on Canstar’s database available for a loan amount of $500,000, 80% LVR and principal & interest repayments; excluding first home buyer only loans. Interest calculations based on principal & interest repayments made over a total loan term of 30 years. Median rate lock fee based on a loan amount of $500,000, for lenders on Canstar’s database that offer rate locks.

Are there downsides to locking in a rate?

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

• If your lender charges a rate lock fee, then you may still be charged this fee, even if your home loan application is ultimately unsuccessful.
• If you lock your fixed rate in and then your lender lowers fixed rates, you will not necessarily be guaranteed this lower rate, so it is important to enquire about your lender’s policy to ensure this will not happen to you.
• You may decide to lock your rate and pay a rate lock fee, only to find that your lender’s rates remain the same until settlement day, in which case you may feel like you paid the fee for nothing.

Ultimately, the longer you plan to fix a home loan for, the more beneficial a rate lock could be, and the more the cost of locking your rate could be outweighed by the potential savings, assuming rate increases over the course of your loan. It is worth keeping in mind that you will not always benefit from locking your rate, and depending on how much your lender charges, you may decide that the additional fee is not worth it for you.

Can I walk away from a rate lock?

Generally speaking, it will be up to the discretion of an individual lender whether or not you can cancel a rate lock. As mentioned above, some lenders will still allow you to take advantage of lower rates, even if you have locked your rate in. However, the lender may still charge you the rate lock fee. Or, if your lender does not allow this, you may be able to negotiate with them to pay an additional fee at a new, lower rate, but once again, this will be at their discretion. It can be helpful to read the fine print when you are considering a home loan – including the Target Market Determination (TMD) and Key Facts Sheet (KFS) as part of your decision making.

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