Lock it in: How to make sure you get the best home loan rate

Locking in a fixed rate can help relieve some of the stress of buying a new home. (Source: Getty) (fizkes via Getty Images)

You’ve shopped around, done your research into home loan providers and finally found the right home loan deal.

As exciting as this may be, it can be turned on its head almost instantly if interest rates shift before the settlement of your property.

• Also read: Inflation fears prompt rush to fix home loan rates

• Also read: Westpac raises rates for 3rd time in a month

• Also read: 'Breakneck speed': NAB and ANZ race to hike rates

The good news is that there is a solution. It’s called ‘rate locking’.

Here’s a breakdown of how it may impact your ability to secure the loan that best suits your circumstances.

What is rate locking?

Rate locking is an option many home loan providers can apply to a fixed home loan, not variable home loans.

An agreement between a borrower and the home loan provider “locks in” the interest rate of the borrower’s fixed-interest home loan for a predetermined period.

This essentially provides the borrower with a layer of protection against a rise in interest rates during the lock period, because it will stay consistent regardless of market changes.

A rate lock is applied before a fixed-rate home loan settles, because it can sometimes take a bit of time to process a home loan application. Once the rate is locked in, depending on the home loan provider and the rate lock available, the rate the borrower applies for will be locked in for up to 90 days before the loan settlement.

Various factors can influence interest rate changes, such as the stock market, the Federal Reserve, inflation, worldwide events and politics.

How long can a rate lock last?

While most rate locks have a period of anywhere between 15-60 days, it is determined based on the loan type, where the borrower lives and the home loan provider they pick.

If the rate lock expires before the borrower’s loan closes, they have the option to pay a fee to extend the lock period; otherwise, they will be stuck with the interest rate that’s available when they lock before closing.

In terms of when the rate lock starts, this is also dependent on the home loan provider. For example, some may place a rate lock on a borrower’s loan on the date they apply, while others may opt only to put the lock after the borrower pays the associated fees.

Pros & cons of rate locking

Like all options available from a home loan provider, it’s important to weigh up the advantages and disadvantages of rate locking.

When it comes to the upsides, these can include:

1. Enjoying low interest rates for longer: This is especially important with the ups and downs that the Australian market is currently facing. Until recently, the RBA confirmed interest rates would remain low, and now it appears this might change ahead of 2024 as more and more big banks raise their fixed mortgage rates.

2. You can relax: It can be stressful searching for a home, so you can be much more calm knowing your home loan is sorted with rate locking.

3. Budget friendly: A higher interest rate can increase your monthly payments significantly, pushing that affordable mortgage right out of your reach. You know how much your monthly payments will be with a rate lock, and you can budget accordingly. This helps you understand how much you can afford toward a house without overstretching your finances.

There are also downsides, such as:

1. Fees: While some home loan providers offer free rate locks, many others charge a fee. Rate locks can generally cost anywhere between $300 to $750, and in some cases, even more.
   
   It’s also worth noting that the rate-locking fee won’t always be refundable if the home loan application is denied.

2. You’re stuck if interest rates drop: If rates drop after you’ve locked in, not all home loan providers will charge you the lower rate.
   
   However, some home loan providers can offer a “float lock”, which allows borrowers to lift the rate if rates fall. Some home loan providers will enable the borrower to float down the rate until closing, while others set limits.

3. Added pressure to find a property: As the rate lock is generally only valid for a set amount of time, the pressure is on to find that dream home before the period ends.

Overall, for those interested in potentially exploring a rate lock, they must do their research, speak to a variety of home loan providers and ensure they understand the ins and outs before signing on the dotted line.

Brodie Haupt is CEO and co-founder of WLTH

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