What is a mortgage rate lock?
A mortgage rate lock is when a bank or lender agrees to hold a certain interest rate for an agreed period of time, usually between when the loan is approved and when it settles.
Kerry explains, “If rates go up during this period, the borrower is protected from having to pay the higher rate. If rates go down, the borrower still pays the lower, locked-in rate.”
For example, in August 2022, the cash rate was 1.85 per cent, and now, at the start of October, it’s 2.6 per cent. So the trend is up. In fact, many economists are speculating that there could be numerous cash rate rises before the end of the year.
The cash rate is important because it directly influences the interest rates charged by banks on their variable rate home loans. In other words, if the cash rate rises, so too will mortgage rates.
This is why it can be beneficial for borrowers to lock in their interest rate when they have the opportunity to do so.
Why lock in your rate?
While Kerry explains she’s not a financial or mortgage advisor, she says there are several reasons why some of her clients choose to lock in their mortgage rates. The main one being to protect against potential interest rate rises.
“In Australia, we haven’t experienced rising interest rates for over a decade, so naturally, many of our clients are finding themselves in unfamiliar waters,” says Kerry.
How does a mortgage rate lock work?
When you lock in your interest rate, it stays the same for an agreed amount of time. For example, perhaps you’ve applied for a home loan with a fixed rate of 3 per cent for the next four years. However, with the frequent rate increases, you’re worried they’ll rise again, pushing your fixed rate up from 3 per cent to 3.2 per cent. The consequence of this is potentially thousands more in monthly repayments over the next four years.
By negotiating a rate lock with your lender when you first apply for your home loan, you’re guaranteeing that the interest rate will stay at 3 per cent. So, if rates do rise to 3.2 per cent, you won’t be affected because your rate is locked in at 3 per cent.
