Who Else Wants to Know What “Rate Lock” Means?

If you’ve been thinking about fixing the interest rate on your home or investment loan you may have come across the term “Rate Lock”, but what does it mean?

Let me Explain.

Firstly, when your home or investment loan is on a fixed interest rate it means that the interest rate will stay the same for the fixed rate period.

One of the main advantages of a fixed rate loan is that you know exactly what your repayments will be for the fixed rate term.

The fixed rate that applies to the loan is based on the fixed interest rate on the day the loan settles, not the interest rate on the day you apply or your loan is approved.

What can happen though is that the interest rate on the day that your loan settles could be higher (or lower) than the interest rate at the time of your loan being approved.

For example, Lets say you apply for a loan and the 3 year fixed interest rate is 3.8% when your loan is approved. A few weeks later when your loan settles the lender has put up the 3 year fixed interest rate to 4.1%.

What this means now is that for the next 3 years your repayments are based on the 4.1% interest rate.

Depending on the size of your loan this could take a big chunk out of your budget.

To avoid this happening the lenders offer what’s called a “Rate Lock” option.

What this means is that for an upfront fee (some are free) the lenders will lock in the interest rate for a period of time (it ranges from lender to lender) that guarantees that the interest rate you receive when the loan settles will be the same interest rate on the day that your loan was approved.

It’s a bit like taking out an insurance policy to protect your future repayments.

Also, if the interest rate is lower on the day the loan settles most lenders will give you the lower rate.

Should you Rate Lock?

It’s a great question and the answer will depend on how you feel about the following.

1: Do you think there is a chance the interest rates will rise before your loan settles (this is a tough question to answer without a crystal ball).

2: If you think the fixed rate will increase would the upfront Rate Lock fee be lower than the increased repayments over the fixed rate term?

Let me give you an example.

Lets say you are taking out a 3 year fixed loan of $400,000 and the lender charges a rate lock fee of 0.15% of the loan amount. In this case the rate lock fee is $600.

If the interest rate remains unchanged from approval to when the loan settles, it has cost you $600.

If the interest rate increases by 0.25% from approval to when the loan settles the additional interest repayment per year is $1,000 or $3,000 over the 3 year fixed rate term.

In this case the $600 Rate Lock fee is lower than the increased repayments.

If you are thinking about fixing in your interest rate and would like to know your options please call me on 0408 648 107.