What is a Rate Lock?

Interest rates are at historic lows, the property market seems to be going bonkers and somehow people in Sydney have $4mil for a run down bedsit.
15 min | Nathan Watt
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What is a Rate Lock?

Interest rates are at historic lows, the property market seems to be going bonkers and somehow people in Sydney have $4mil for a run down bedsit.

You’re thinking that this can’t last, and you’d love to get in on one of those ultra low fixed rate loans.

You’ve got approval in principle, you find a house, and the contract gets accepted. You beauty!

You’ve submitted the full application to the lender for the fixed rate you want, but settlement is 60 days and by the time that comes around the bank has raised their interest rate on the one you wanted.

But you still get the original rate right?

Ah no.

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You get the rate on the day the loan settles.

Not the day you submitted the application,

Not the day you get the unconditional offer letter.

But the day the property settles.


Offers Are Just That

You know all that paperwork the bank sends you?

Yeah that stuffs important.

In there you’ll see that an offer isn’t a guarantee. It’s just an offer and things can change. The banks have really expensive lawyers that write stuff like that, that gives the bank flexibility.

One of those things is that the fixed rate can move by the time the property settles and that’s the rate you get. Unless…..

Rate Lock

A rate lock is an optional extra when you’re doing your application paperwork. And this option is not a free upgrade. Some banks have a flat rate, some have a flat rate or a percentage of the loan balance whichever is higher sort of thing. So it pays to crunch the numbers before you tick the box.

Because that fee could end up being cheaper than the higher interest rate over your fixed term period.

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But it might also be more expensive.

Because it’s all based on what you think might happen. It’s a punt on what you think the banks are going to do.

So if you think the fixed rate might go up 0.1% on a 1 year term (because the other banks have already done this, but your bank is holding back), but the bank is charging you 0.15% to rate lock, it doesn’t add up.

If you’re worried the bank is going to up 0.3%, or you’re looking at a 3 year fixed rate, then the outcome is different.

So there is no cut and dry answer, and you won’t know if you were right from a financial sense until the loan settles. But what it does do is give you certainty.

If you rate lock, and it costs a few grand, that sense of certainty might be more valuable to you than the few grand you gifted the bank if they don’t move their rates whilst you’re settling the loan.

So if you are going through the loan process either buying or refinancing and you’re thinking of a fixed rate product, have a think and ask the question of your broker/bank about rate locking.

Need a hand? We have some. Get them here.

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