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What is a home loan rate lock?

When applying for a home loan, there are multiple components that need to be considered. You need to think about the different lenders, fees, features, structures, and interest rates. Going through a lengthy loan application only to find that your lender’s interest rates have increased prior to settlement can be frustrating, especially if you have gone through the process of creating a budget based on the rate you thought you were going to get.

When should I consider a rate lock?

This is where rate locks become useful. In an environment where interest rates on mortgages are constantly changing, locking in a rate can be a useful option to protect your interest rate for a set period of time (usually 30 to 90 days). In the event that rates rise, your lower rate is protected. And if rates were to decrease you can still take advantage of the lower rate. You can apply to lock your rate with your lender for a fee. The fee varies from lender to lender and is either calculated as a percentage of the loan amount or is charged as a flat fee usually within the $500 – $750 range.

How does a rate lock work?

As an example, using ASIC’s money smart calculator, if you are fixing a $1m loan for 3 yrs, and your lender increases your fixed rate say 0.3% the week before you settle, that will cost you up to $9,000 extra in interest over the 3 yr fixed term.

Based on this example the cost of the rate lock would be covered by the first year’s savings alone, depending on the lender*.

Speaking to your broker is the best way to determine if using a rate lock is a suitable option for you based on your unique circumstances. For more information, watch our video below or fill in the form here and we will organise a time to call whenever suits you.

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