Paying a rate lock fee requires careful consideration
Fixed interest rates are not pegged to the RBA Cash Rate. They often depend on the availability of low cost foreign funds but these rates can be influenced by circumstances that have no direct relationship with what is happening in Australia. As a result these rates can move in a completely opposite direction to variable rates and those changes often come with little notice.
Loan applications and settlements can take many weeks or even months to complete so when you ask for a fixed rate loan the rate that will actually apply will be the rate on offer on the day the loan settles – and this could be higher or lower than the rate on the day that you applied. Some lenders offer free 60 – 90 day rate locks however for most in order to guarantee that you get the rate that you applied for you can lock in the quoted rate but it usually costs you around .15% of the home loan amount. So if your fixed rate loan amount is $250,000 then you typically have to pay (usually upfront) a rate lock fee of $375 and this will normally guarantee the rate for 90 days. NOTE: this is generally the case however can vary in cost and in the period covered from one lender to another.
A recent development is lenders using low fixed rates to generate new business however this often results in overloading their processing ability and approvals can blow out to several weeks. In these cases the lenders often increase their rates in order to bring the demands on their processing back to a reasonable level. This means that even when the rest of the market is offering lower rates your lender may increase without notice.
If your current lender is offering an attractive fixed rate you can often arrange a switch simply by making a phone call – but don’t forget to ask what switching fees they will charge and it’s worth asking them to waive this fee – after all they are virtually guaranteed of your business for the fixed interest rate period.
Also, locking in for a fee is usually only justified for longer fixed rate periods. For instance some ‘honeymoon rates’ are fixed rates and can be locked in. But the fee for doing so of .15% or more is usually more than rates are likely to rise in the time between letter of offer and settlement. If you’re contemplating a ‘rate lock’ fee give us a call and we can discuss with you how likely fixed rates are to rise before settlement. Some times the premium you pay is not worth it, but it could be if the fixed rate market is rising or if you are particularly risk averse.