So you decided to lock in a fixed rate home loan while the rates are hot? But what happens if you haven’t settled on your new home yet? While you would be inclined to panic every time there was talk of an interest rate rise, there is a way to avoid this and lock in your fixed rate before you’re approved.
What is a lock rate fee?
If you choose to pay a lock rate fee you can secure the interest rate and beat any rate rises.
The exact fee charged to lock in a fixed rate will be at your lender’s discretion, with some charging a fixed rate lock fee while others calculate it based on a percentage of the amount being borrowed. For instance, one institution may charge a $700 rate lock fee, while some offer the service free of charge.
Why pay the fee?
One of the main reasons to opt for a rate lock fee is when you’re concerned rates will rise in the time after you apply for a home loan and before you are approved. It’s usually offered to new loan customers exclusively – so if you’re thinking of switching to a fixed rate after holding a loan for period, you’ll not likely be able to pay a rate lock fee for this service.
It can be a great option, because it gives the borrower peace of mind and can save you a lot of money in the long run.
For example, if you want to borrow $300,000 to purchase a property and the best three-year fixed rate is 7.14 percent, the rate lock fee may be $500. If during that period the bank increases rates by 0.25 percent you may save around $600 per year or $1,800 over three years. That’s an overall saving of $1,300 after deducting the rate lock fee, so clearly it can be worth your while.
On the other hand if the bank drops its rates then you’ll still be offered the lower rate on your home loan, but the rate lock fee will not be refunded.
Rate-locking can be a good idea, particularly during times of market volatility as it typically puts a rate on hold for you for about 90 days – although this may vary so check with your provider.
Need to work out your home loan figures to see how much a rate rise could affect your repayments. Go ahead and use the RateCity home loan repayment calculator.