What is a rate lock?

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on February 16, 2022 Fact Checked
What is a rate lock?

If you want to ensure your home loan avoids the uncertainties of interest rate rises before settlement, you might want to say ‘Lock it in Eddie’.

Fixed home loan rates provide security ensuring your repayments and interest remain consistent throughout the life of the loan. While this may be the case, fixed home loan rates like any financial product are subject to market movement meaning rates are able to change up until your home loan has reached settlement. In comes ‘rate locking’.

In this article, we’ll take a look at:


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Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Lender

Variable
More details
UNLIMITED REDRAWSSPECIAL OFFER
  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
UNLIMITED REDRAWSSPECIAL OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
Variable
More details
AN EASY DIGITAL APPLICATION
  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster
AN EASY DIGITAL APPLICATION

Neat Variable Home Loan (Principal and Interest) (LVR < 60%)

  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster
Variable
More details
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES
  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
Variable
More details
NSW/VIC/SA METRO & INNER REGIONAL AREAS$5000 CASHBACK. T&Cs APPLY.
  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
NSW/VIC/SA METRO & INNER REGIONAL AREAS$5000 CASHBACK. T&Cs APPLY.

Variable Home Loan (Principal and Interest)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of May 26, 2022. View disclaimer.

What is a rate lock?

A rate lock is a feature of a fixed rate home loan that can guarantee your fixed interest rate for your chosen fixed rate term and protect you against rate rises. When you take out a fixed rate loan, you normally receive the interest rate that applies on the day your home loan is settled. This could be different to the rate on the day you first applied - annoying!

Rate lock protects you as the borrower from any interest rate rises from the time of loan application to unconditional approval and settlement. Before settlement, a home loan interest rate could rise, putting you out of pocket and placing an added burden on your budget.

With a rate lock, if the rate drops most lenders would allow you to have the lower rate, but if rates increased you would be protected. In this sense, you could consider a rate lock as a type of insurance policy.

Rate locking is an option that can be only applied to a fixed rate home loan. Some lenders may not offer a rate locking feature, so it’s important to check before choosing your home loan.

Rate lock fees

It is common for lenders to charge you a fee for the rate lock feature. The actual fee amount varies from lender to lender with some charging a set fee, whilst others calculate the fee as a percentage based on the amount you are borrowing. Locking in a fixed rate can range from anywhere from $300 to $1,000 depending on the lender.

Rate Locking Example

Ray Telock has found his dream home, and a lender offered him a competitive fixed interest rate of 2.00% p.a.

He applies in September when this rate is fresh, but doesn’t actually settle on the loan until November, by which point the fixed rate has jumped to 2.50% p.a.

Being that his home loan is $600,000 on a 30-year term, this results in a difference of $153 per month.

He weighs up the options with 20/20 hindsight and figures it would have been worth paying the 0.10% rate lock fee of $600 his bank offered - all of which could have paid for itself in four months.

How long does a rate lock last?

You will find each lender has a different time period for the length of the rate lock. Generally banks will lock a fixed rate in for anywhere between two and three months.

CommBank

Rate locking with Australia’s largest bank expires 90 days after the rate lock fee of $500 is charged. If the 90th day falls on a weekend or public holiday, the expiry will be extended out to the next business day.

ANZ

ANZ offers rate locking for 90 days once the rate lock fee of $750 is charged.

Westpac

Westpac offers rate locking for 90 days following the lock-in fee of 0.10% of the loan amount being charged. For example, if your home loan is $650,000 Westpac will charge a rate lock fee of $650.

NAB

NAB’s rate locking feature provides protection from changing interest rates for 90 days. In similar fashion to Westpac, to lock in a rate NAB charges 0.15% of the loan amount payable upfront. For example, if your home loan is $650,000 NAB will charge a rate lock fee of $975.

Bank of Queensland

Bank of Queensland offers rate locking for 100 days from the date your request is processed. Bank of Queensland charges 0.15% of the approved loan amount, similarly to the example provided above.

Bendigo Bank

Bendigo Bank offers rate locking for 90 days from the time your rate lock application is received. For loans less than $500,000, Bendigo charges an upfront fee of $600 + 0.15% of the loan amount. For loans of $500,000 and above an upfront fee will be advised at the time of your fixed rate lock application in addition to the 0.15% of the loan amount.

Suncorp

Suncorp offers rate locking as a ‘Guaranteed Rate’ lasting for 90 days following your rate lock application. To receive a rate lock, Suncorp charges the higher of $600 or 0.15% of the borrowed amount.

Heritage Bank

Heritage Bank offers rate locking for 90 days from the date your rate lock request is processed. Heritage Bank charges 0.15% of the approved loan amount for a rate lock.

People’s Choice

People’s Choice offers rate locking for 90 days from the date of rate lock application. People’s Choice charges a rate lock fee of 0.15% of the total loan amount to provide protection from changing rates.

These lenders aside, some other popular lenders such as Macquarie, Greater Bank, Great Southern Bank do not offer the rate locking feature across their fixed home loans.

Rate lock figures correct at the time of writing.

Rate lock benefits and drawbacks

Benefits

There are obvious positives with locking in a fixed rate, including the security that comes with a rate lock in the event interest rates rise and the certainty of what repayments will be during the fixed period.

  • If your loan application takes longer, such as if you have multiple or unconventional streams of income, are low-doc, or have a left-of-field profession, rate locking could prove useful in that it shields you from rate rises.

  • If you need time to find and secure the perfect property, this is where a rate lock may also prove useful. Mortgage pre-approval is not necessarily watertight, and usually only lasts for three months too so locking in a rate that covers pre-approval to unconditional approval to settlement could be useful.

Drawbacks

Before you sign on the dotted line it’s important you also understand the drawbacks.

  • Locking in a low fixed rate means borrowers could face much higher interest rates when they roll out of the fixed period - after all, nobody knows what interest rates could look like in a number of years.

  • There is also less flexibility when locking in a fixed rate. As a result of the structure of fixed rates, borrowers are often restricted from making extra repayments and generally they can't refinance if a better deal comes along unless they are willing to pay a hefty break fee.

  • With a rate lock, there is no guarantee rates will rise in the time before settlement, meaning a borrower could pay the fee unnecessarily.

  • If your property search comes to no avail, taking out a rate lock too soon means it could expire before settlement takes place.

  • Depending on the severity of interest rate rises and your home loan size, the rate lock fee might not be any more beneficial than copping the extra interest.

Savings.com.au’s two cents

Rate locking could be a good idea when interest rates are trending upwards. Locking in a fixed rate could provide security for the future, but at the end of the day no one has a crystal ball. It’s important when considering a rate lock to understand the type of loan on offer, the interest rate, the length of the loan, and your current financial position.


Image by iMattSmart via Unsplash

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Jacob Cocciolone joined the Savings team in 2021 as a Finance Journalist. Driven by a passion for keeping Australians up to date with the latest financial news and trends, his areas of interest include financial technology, investing, property and motoring.

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