June 27, 2011
When you apply for a fixed-rate mortgage with most institutions, the advertised rate is the current fixed rate of that day. But there’s no guarantee that rate will be available in six weeks at settlement, unless you pay a rate-lock fee.
So if you’re concerned that rates will rise in the time between applying for a home loan and settlement, a rate lock service can be a great option as it will give you peace of mind and can save you money in the long run.
Of more than 700 residential fixed loans available through RateCity, half offer a fixed-rate lock service with a fee. The fee ensures that an agreed interest rate will be on hold for you for a period of time, such as 90 days.
The fee charged will depend on the lender with some charging a fixed fee, which may range from $0 up to $750 while others charge a percentage of the loan. For instance, if the fee is calculated at 0.25 percent and you intend to borrow $300,000 then the fee in this case will be $750.
When should you rate lock?
Your decision to lock in a rate at a fee will depend on a number of factors, not least of which is market volatility. When a rate rise is imminent rate-locking prior to interest rates soaring may save you hundreds if not thousands of dollars.
For example, if you’re looking at a $300,000 mortgage at a three-year fixed rate of 7.14 percent the fee to lock in the rate for 90 days may be $450. If in the application to funding stage the bank announces an interest rate rise of 25 basis points taking the new rate to 7.39 percent, you will have saved 0.25 percent. That’s a saving of around $600 per year or $1800 over three years, and a total saving of $1350 after deducting the rate-lock fee.
On the other hand, if rates decrease after you have paid a rate-lock fee the lower interest rate will be applied on the day of settlement in most cases, but the fee may not be refundable.
Some of the top residential three-year fixed home loans with a rate-lock service available through RateCity include:
- CUA at 7.14 percent, which will lock the rate for 90 days at no charge;
- Yellow Brick Road offers a rate of 7.14 percent and a 90-day rate-lock service charged at 0.15 percent of the balance ($450 on a $300,000 mortgage);
- and Heritage Building Society at 7.15 percent has a 90-day rate lock charged at 0.12 percent of the balance ($360 on a $300,000 balance).
Rate-locking can ease your mind when buying or refinancing a home, but it comes at a price. So weigh up the costs, do your research by keeping an eye on market movements and make sure you compare mortgages online to get the best deal available.
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