So you’ve found the perfect property, signed the contract of sale and have just found a fixed interest home loan that suits your needs. If this is the case, it may be worth being aware of rate locking, and talking to your lender about whether it is an option that you should consider.
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Rate locking is an option that can be applied to a fixed rate home loan. This will lock in the interest rate of your fixed interest home loan before your loan application has been completed, protecting you if rates increase. However, some mortgage lenders will also allow you to have a lower interest rate if rates fall before your settlement, so make sure to check with your lender before locking your rate.
A mortgage broker can help you find a lender that will benefit from an interest rate drop after a rate lock. Both new home loan applicants and borrowers who are refinancing can make use of rate locking. Don’t forget to secure your rate lock in writing with a formal loan commitment letter from the lender.
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Whilst you do not have to choose to rate lock your fixed loan, it might be a good idea if you expect your application to take a while to be approved, or if you simply want peace of mind that should the interest rates rise, your home loan will not be affected.
Getting a rate lock is a particularly good idea during a volatile market, where mortgage interest rates are fluctuating frequently. A lot can change between you finding your ideal fixed home loan product and your application being approved. This is why getting a rate lock when you apply for a mortgage can be a big help in keeping your home loan costs as low as possible.
It’s important to keep in mind that your lender may charge you a rate lock fee. How much you'll be charged will depend on the lender. Many lenders charge a rate locking fee that amounts to around 0.20% of the loan amount.
Other lenders may charge a flat fee, often proportional to the loan amount (e.g. $750 per $1 million). However, you should ask your lender about rate locking because some do offer it for free, for the first 60 days, for example.
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The main things to be aware of when locking an interest are:
Starting time on your rate lock will vary depending on the lender, so it’s important to clarify with them to ensure that you do not end up paying a high interest rate. Whilst some will place a rate lock on your loan from the date you apply, others will only commence it once you’ve paid the rate locking fee.
In regards to when a mortgage rate lock expires, once again this will differ from lender to lender. Some lenders offer you 60 days, whilst others are willing to rate lock for 3 months. A longer rate lock period may be something to consider if you have a complicated loan application that is expected to take some time to process.
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Fortunately, many lenders will actually let you pay less interest on your locked rate if there is a drop in the interest rate. This is not a definite however, so it might be a good idea to consult with your lender before deciding on a rate lock.
If you are choosing a fixed home loan, it may be helpful to talk to one of our Lendi Home Loan Specialists, who can help you decide on a lender and whether choosing a rate locking option is right for you.
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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.
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