Rate lock? What rate lock?!

“Congratulations your 3 years fixed home loan at 3.79% has been unconditionally approved!”

For those of you who have ever brought a house and is anxiously waiting on the lender of choice to give you the green light to the mortgage loan you’ve applied for, this email is exactly what the doctor has ordered on a Friday afternoon.

Finally, the stress has been lifted off your shoulder and you can look forward to shopping for your new home. And 3.79% fixed is a great rate, and exactly as your broker has promised. Happy days!

So you meet up with him the following week, and signs up the mortgage.

Settlement went through smoothly, and the day after settlement, you log into your online banking for the first time to check on your new loan, and to your horror and dismay: “4.09% 3 years fixed home loan.”

“What?! But he promised me 3.79%? What in the world?“

What went wrong?

It comes down to some very bad timing, and the option of rate lock not been discussed.

Just like standard variable rates which all banks have and readily publish, they also have a standard fixed rate for their different products.

Much like a variable home loan, when you take up a fixed loan, you will get a discount for the life of the loan (say 0.20% for example), which is subtracted by the standard fixed rate (say 3.99%).

 3.99% standard fixed rate

- 0.20% discount

= 3.79% Rate as per mortgage document at the time printing

As we know, banks can (and will) change rates at a whim, not only for their standard variable rate, but for stand fixed rate also.

So in the above situation the bank unfortunately announced an increase to their standard fixed rate by 0.30%, bringing it to 4.29%

4.29% standard fixed rate

-0.20% discount

= 4.09% Final rate at the time of settlement

This is why all banks offer a rate lock product, and this is why it is important for all brokers to have that conversation with their customers who are taking up a fixed loan product.

Rate lock products are either a flat fee or a % of the loan, and it is not cheap. Depending on your loan, it can range from a few hundred dollars to thousands.

And is generally a guessing game as to whether you should take it or not.

Some worthwhile considerations when discussing the option with your broker are:

- Size of your loan

-Has my lender recently raised fixed rates in the last couple of months?

- Has other lenders raised theirs recently, if my lender was the only one that hadn't raised it, you might assume one is coming soon.

- If fixed rates were to rise by 0.25%, what would your new fixed rate payment be? How much would that affect your budgeting?

At the end of the day whether you do lock your fixed rate or not, it is always a worthwhile conversation to have with your broker so all your options can be fully explored.