The Pros And Cons Of Fixed Rate Lock On Loans

What Are The Pros And Cons Of Choosing A Fixed Rate Lock On Your Home Or Investment Property Loan?

Firstly to answer this question, we need to understand first what a fixed-rate loan is.  Another thing that is helpful is to understand the other loan types there are so you can fully understand the differences of a fixed-rate loan to make a more informed decision for your circumstances.

What Does Each Rate Type Mean?

If you Google ‘loan rate types’ these are the typical results you will be returned in a search.  The below rate types are the primary rate types that will be available for home and investment property loans.

What Is A Variable Rate Loan?

If you choose a variable rate loan, your interest rate may go up or down at any time in line with changes in the economy and lending market.  Variable-rate loans usually offer the greatest amount of flexibility when it comes to making extra repayments or switching loans, however, you’ll need to be prepared for your repayments to increase if the interest rate goes up.

What Is A Fixed Rate Loan?

On the other hand, the interest on a fixed-rate loan will remain the same for a time period of your choice (usually between 1 and 5 years). On the plus side, this can be easier for budgeting purposes as your repayments will stay the same, and you are protected from future rate rises during the fixed period. Currently, many fixed interest rates are lower than variable rates, so this can mean an initial saving on the interest you pay. However, there are generally restrictions on making extra loan repayments, accessing redraw or offset options, or switching your loan during the fixed-rate period, and you’ll miss out on any benefit if interest rates go down.

What Is A Split Loan?

In a split loan, it is possible to fix only part of your loan while keeping the rest on a variable rate.

If you are considering a fixed loan or split loan, it’s important to take note of the following information.

So, now that we understand what the different loan types are.  Let’s move on to the Fixed-Rate Loan in more detail.

What Is A Fixed Rate Lock And Is It Worth Considering? 

When you are applying for a fixed or split home loan, most banks will give you the option of paying a fixed rate lock fee.

It’s important to note that when you apply for a loan, it can be several weeks or even months until the loan ‘settles’ (i.e. the time your purchase or refinance is finalised).

With most banks, the home loan interest rate that applies to your loan is the rate as it stands on the date of settlement, NOT the date you applied for the loan. This means if rates increase between application and settlement, the higher rate will usually apply.

Many banks allow you to guard against this by paying a fixed rate lock fee. A rate lock fee allows you to ‘lock in’ the rate at the time you apply, so you will not be affected if rates rise between application and settlement.

This is a particularly important consideration at the moment, as many banks have started to increase their fixed rates over the past few months.

Depending on the bank, the fixed-rate lock fee may be charged as either a flat fee or a percentage of the loan amount. Your broker will go through all the costs, relevant information, and terms & conditions with you to help you make an informed decision.

Now we will explore more specific information and go a little deeper into fixed-rate locks and their options and how they would affect things if you chose this as an option.

What Is A Fixed Rate Lock?

A fixed-rate lock is different from a fixed-rate loan.

When you are applying for a fixed rate home loan, most banks will give you the option of paying a fixed rate lock fee. When you apply for a loan, it can be several weeks or even months until the loan ‘settles’ (i.e. the time your purchase or refinance is finalised)

With most banks, the home loan interest rate that applies to your loan is the rate as it stands on the date of settlement, NOT the date you applied for the loan. This means if rates increase between application and settlement, the higher rate will usually apply. Many banks allow you to guard against this by paying a fixed rate lock fee.

A rate lock fee allows you to ‘lock in’ the rate at the time you apply, so you will not be affected if rates rise between application and settlement.

Should I Lock In A Fixed Interest Rate?

What Happens If You Lock In An Interest Rate?

If you opt for a fixed-rate loan, you effectively lock in a set rate for a time period of your choice (usually between 1 and 5 years).

There are a number of risks and benefits to consider when deciding if this is the right option for you.

On the plus side, a fixed rate can be easier for budgeting purposes as your repayments will stay the same, and you are protected from future rate rises during the fixed period.

However, with fixed-rate loans, there are generally restrictions on making extra loan repayments, accessing redraw or offset options, or switching your loan during the fixed-rate period, and you’ll miss out on any benefit if interest rates go down.

When you are applying for a new fixed-rate loan, most banks also give you the option of paying a fee to lock in the fixed interest rate at the time you made the loan application to guard against the risk of rate increases before your loan is finalised.

Most banks allow you to lock in a fixed interest rate for up to 90 days from the date you apply for the loan, however, some offer shorter periods. This can be a useful feature if you expect interest rates to increase before your loan is finalised, but the fee is generally non-refundable even if rates decrease or stay the same.

Is It Worth It To Lock Interest Rates?

It can be worth locking in an interest rate if you expect rates to increase, or if you like the certainty of fixed repayments for a particular period of time. Your broker can talk you through the risks and benefits of locking in an interest rate in your particular circumstances.

If you opt for a fixed-rate loan, you effectively lock in a set rate for a time period of your choice (usually between 1 and 5 years). On the plus side, a fixed rate can be easier for budgeting purposes as your repayments will stay the same, and you are protected from future rate rises during the fixed period.

However, with fixed-rate loans, there are generally restrictions on making extra loan repayments, accessing redraw or offset options, or switching your loan during the fixed-rate period, and you’ll miss out on any benefit if interest rates go down.

When you are applying for a new fixed-rate loan, most banks also give you the option of paying a fee to lock in the fixed interest rate at the time you made the loan application to guard against the risk of rate increases before your loan is finalised.

Most banks allow you to lock in a fixed interest rate for up to 90 days from the date you apply for the loan, however, some offer shorter periods. This can be a useful feature if you expect interest rates to increase before your loan is finalised, but the fee is generally non-refundable even if rates decrease or stay the same.

What Happens When Your Fixed-Rate Ends?

When your fixed-rate ends, your loan generally reverts to the standard variable rate at the time unless you make other arrangements. The standard variable rate might be higher, lower or the same as your fixed rate depending on how rates have changed during the fixed period.

At NBS Home Loans, we contact all clients in the lead up to the end of their fixed-rate period to discuss your options and ensure that you stay at a sharp rate in future.

Can You Pay Off A Fixed-Rate Loan Early?

Most banks limit the number of extra payments that can be paid to a fixed-rate loan during the fixed-rate period (the limit varies between banks). You will usually incur costly financial penalties if you exceed the repayment limit for your loan.

If this is something you are considering, it’s advisable to contact your bank for an estimate of the financial penalties that will apply and then discuss this with your mortgage broker.

How Long Can You Lock In An Interest Rate?

The interest on a fixed-rate loan will remain the same for a time period of your choice. This is usually between 1 and 5 years, although some banks will allow you to lock in a rate for up to 10 years. 

When you are applying for a new fixed-rate loan, most banks also give you the option of paying a fee to lock in the fixed interest rate at the time you made the loan application to guard against the risk of rate increases before your loan is finalised. Most banks allow you to lock in a fixed interest rate for up to 90 days from the date you apply for the loan, however, some offer shorter periods.

Do You Pay For Rate Lock?

A rate lock is an optional feature that can be exercised when you have applied for a fixed-rate loan. During the application process, most banks give you the option of paying a fee to lock in the fixed interest rate at the time you made the loan application to guard against the risk of rate increases before your loan is finalised. Most banks charge a fee for this feature. Depending on the bank, this may be charged as either a flat fee or a percentage of the loan amount. 

If you have an existing variable rate loan and you decide to switch it to a fixed-rate loan with the same bank, most banks do not charge a fee for this (however some do, particularly if you have a basic or ‘no frills’ home loan).

What Is The Purpose Of Rate Lock?

A fixed-rate lock is different from a fixed-rate loan.

When you are applying for a fixed rate home loan, most banks will give you the option of paying a fixed rate lock fee. When you apply for a loan, it can be several weeks or even months until the loan ‘settles’ (i.e. the time your purchase or refinance is finalised).

With most banks, the home loan interest rate that applies to your loan is the rate as it stands on the date of settlement, NOT the date you applied for the loan. This means if rates increase between application and settlement, the higher rate will usually apply.

Many banks allow you to guard against this by paying a fixed rate lock fee. A rate lock fee allows you to ‘lock in’ the rate at the time you apply, so you will not be affected if rates rise between application and settlement.

How Much Does A Rate Lock Cost?

Depending on the bank, the fixed-rate lock fee may be charged as either a flat fee or a percentage of the loan amount.

Your broker will go through all the costs, relevant information, and terms & conditions with you to help you make an informed decision.

Can I Walk Away From A Rate Lock?

A rate lock is an optional feature that can be exercised when you have applied for a fixed-rate loan.

During the application process, most banks give you the option of paying a fee to lock in the fixed interest rate at the time you made the loan application to guard against the risk of rate increases before your loan is finalised. This fee is generally non-refundable regardless of whether rates change or not.

If rates decrease before your loan is finalised, some banks will offer you the lower rate, while others will still apply the rate as it stood on the day you elected to ‘lock it’. Your broker will talk you through the risks and benefits of rate lock, as well as the terms and conditions of your particular bank.

Can I Change My Mortgage From Fixed To Variable?

Can I Refinance During A Fixed Term? 

If you’ve locked your mortgage into a fixed rate, your bank will charge break costs to change to a variable rate during the fixed-rate period.

The break cost varies depending on a number of complex factors, including current interest rates, the cost of funding, the size of your loan and the remaining term, and the bank’s own costs.

It can typically run to several thousand dollars (or even tens of thousands depending on your loan size) to break a fixed-term loan.

If this is something you are considering, it’s advisable to contact your bank for an estimate of your break costs and discuss this with your mortgage broker.

How Do I Change My Mortgage When The Fixed-Rate Ends?

Your bank will notify you when your fixed rate is expiring and will let you know the new rate that applies after the expiry date. At NBS Home Loans, we contact all clients in the lead up to the end of their fixed-rate period to discuss your options and ensure that you stay at a sharp rate in future.

How Do I Change My Existing Loan From A Variable Rate To Fixed-Rate?

In most cases, your bank can make this switch for you. However, we advise you to chat with us before locking in a fixed rate so we can help you decide if this is the right option and talk through any other options you may not have considered.

I Googled Mortgage Types And Got Results About Adjustable Mortgages, Jumbo Mortgages, and FHA Insured Loans… What Does This All Mean?

These are all American concepts and either doesn’t apply or these are known by other names in the Australian market.

At NBS Home Loans, we’ll talk you through the mortgage types that are available to you to keep things simple and help you make an informed choice.

Call us on 0434 103 326 and we can answer questions or go through things with you.

Now we will explore more specific information and go a little deeper into fixed-rate locks and their options and how they would affect things if you chose this as an option.

What Is A Fixed Rate Lock?

A fixed-rate lock is different from a fixed-rate loan.

When you are applying for a fixed rate home loan, most banks will give you the option of paying a fixed rate lock fee. When you apply for a loan, it can be several weeks or even months until the loan ‘settles’ (i.e. the time your purchase or refinance is finalised)

With most banks, the home loan interest rate that applies to your loan is the rate as it stands on the date of settlement, NOT the date you applied for the loan. This means if rates increase between application and settlement, the higher rate will usually apply. Many banks allow you to guard against this by paying a fixed rate lock fee.

A rate lock fee allows you to ‘lock in’ the rate at the time you apply, so you will not be affected if rates rise between application and settlement.

Should I Lock In A Fixed Interest Rate?

What Happens If You Lock In An Interest Rate?

If you opt for a fixed-rate loan, you effectively lock in a set rate for a time period of your choice (usually between 1 and 5 years).

There are a number of risks and benefits to consider when deciding if this is the right option for you.

On the plus side, a fixed rate can be easier for budgeting purposes as your repayments will stay the same, and you are protected from future rate rises during the fixed period.

However, with fixed-rate loans, there are generally restrictions on making extra loan repayments, accessing redraw or offset options, or switching your loan during the fixed-rate period, and you’ll miss out on any benefit if interest rates go down.

When you are applying for a new fixed-rate loan, most banks also give you the option of paying a fee to lock in the fixed interest rate at the time you made the loan application to guard against the risk of rate increases before your loan is finalised.

Most banks allow you to lock in a fixed interest rate for up to 90 days from the date you apply for the loan, however, some offer shorter periods. This can be a useful feature if you expect interest rates to increase before your loan is finalised, but the fee is generally non-refundable even if rates decrease or stay the same.

Is It Worth It To Lock Interest Rates?

It can be worth locking in an interest rate if you expect rates to increase, or if you like the certainty of fixed repayments for a particular period of time. Your broker can talk you through the risks and benefits of locking in an interest rate in your particular circumstances.

If you opt for a fixed-rate loan, you effectively lock in a set rate for a time period of your choice (usually between 1 and 5 years). On the plus side, a fixed rate can be easier for budgeting purposes as your repayments will stay the same, and you are protected from future rate rises during the fixed period.

However, with fixed-rate loans, there are generally restrictions on making extra loan repayments, accessing redraw or offset options, or switching your loan during the fixed-rate period, and you’ll miss out on any benefit if interest rates go down.

When you are applying for a new fixed-rate loan, most banks also give you the option of paying a fee to lock in the fixed interest rate at the time you made the loan application to guard against the risk of rate increases before your loan is finalised.

Most banks allow you to lock in a fixed interest rate for up to 90 days from the date you apply for the loan, however, some offer shorter periods. This can be a useful feature if you expect interest rates to increase before your loan is finalised, but the fee is generally non-refundable even if rates decrease or stay the same.

What Happens When Your Fixed-Rate Ends?

When your fixed-rate ends, your loan generally reverts to the standard variable rate at the time unless you make other arrangements. The standard variable rate might be higher, lower or the same as your fixed rate depending on how rates have changed during the fixed period.

At NBS Home Loans, we contact all clients in the lead up to the end of their fixed-rate period to discuss your options and ensure that you stay at a sharp rate in future.

Can You Pay Off A Fixed-Rate Loan Early?

Most banks limit the number of extra payments that can be paid to a fixed-rate loan during the fixed-rate period (the limit varies between banks). You will usually incur costly financial penalties if you exceed the repayment limit for your loan.

If this is something you are considering, it’s advisable to contact your bank for an estimate of the financial penalties that will apply and then discuss this with your mortgage broker.

How Long Can You Lock In An Interest Rate?

The interest on a fixed-rate loan will remain the same for a time period of your choice. This is usually between 1 and 5 years, although some banks will allow you to lock in a rate for up to 10 years. 

When you are applying for a new fixed-rate loan, most banks also give you the option of paying a fee to lock in the fixed interest rate at the time you made the loan application to guard against the risk of rate increases before your loan is finalised. Most banks allow you to lock in a fixed interest rate for up to 90 days from the date you apply for the loan, however, some offer shorter periods.

Do You Pay For Rate Lock?

A rate lock is an optional feature that can be exercised when you have applied for a fixed-rate loan. During the application process, most banks give you the option of paying a fee to lock in the fixed interest rate at the time you made the loan application to guard against the risk of rate increases before your loan is finalised. Most banks charge a fee for this feature. Depending on the bank, this may be charged as either a flat fee or a percentage of the loan amount. 

If you have an existing variable rate loan and you decide to switch it to a fixed-rate loan with the same bank, most banks do not charge a fee for this (however some do, particularly if you have a basic or ‘no frills’ home loan).

What Is The Purpose Of Rate Lock?

A fixed-rate lock is different from a fixed-rate loan.

When you are applying for a fixed rate home loan, most banks will give you the option of paying a fixed rate lock fee. When you apply for a loan, it can be several weeks or even months until the loan ‘settles’ (i.e. the time your purchase or refinance is finalised).

With most banks, the home loan interest rate that applies to your loan is the rate as it stands on the date of settlement, NOT the date you applied for the loan. This means if rates increase between application and settlement, the higher rate will usually apply.

Many banks allow you to guard against this by paying a fixed rate lock fee. A rate lock fee allows you to ‘lock in’ the rate at the time you apply, so you will not be affected if rates rise between application and settlement.

How Much Does A Rate Lock Cost?

Depending on the bank, the fixed-rate lock fee may be charged as either a flat fee or a percentage of the loan amount.

Your broker will go through all the costs, relevant information, and terms & conditions with you to help you make an informed decision.

Can I Walk Away From A Rate Lock?

A rate lock is an optional feature that can be exercised when you have applied for a fixed-rate loan.

During the application process, most banks give you the option of paying a fee to lock in the fixed interest rate at the time you made the loan application to guard against the risk of rate increases before your loan is finalised. This fee is generally non-refundable regardless of whether rates change or not.

If rates decrease before your loan is finalised, some banks will offer you the lower rate, while others will still apply the rate as it stood on the day you elected to ‘lock it’. Your broker will talk you through the risks and benefits of rate lock, as well as the terms and conditions of your particular bank.

Can I Change My Mortgage From Fixed To Variable?

Can I Refinance During A Fixed Term? 

If you’ve locked your mortgage into a fixed rate, your bank will charge break costs to change to a variable rate during the fixed-rate period.

The break cost varies depending on a number of complex factors, including current interest rates, the cost of funding, the size of your loan and the remaining term, and the bank’s own costs.

It can typically run to several thousand dollars (or even tens of thousands depending on your loan size) to break a fixed-term loan.

If this is something you are considering, it’s advisable to contact your bank for an estimate of your break costs and discuss this with your mortgage broker.

How Do I Change My Mortgage When The Fixed-Rate Ends?

Your bank will notify you when your fixed rate is expiring and will let you know the new rate that applies after the expiry date. At NBS Home Loans, we contact all clients in the lead up to the end of their fixed-rate period to discuss your options and ensure that you stay at a sharp rate in future.

How Do I Change My Existing Loan From A Variable Rate To Fixed-Rate?

In most cases, your bank can make this switch for you. However, we advise you to chat with us before locking in a fixed rate so we can help you decide if this is the right option and talk through any other options you may not have considered.

I Googled Mortgage Types And Got Results About Adjustable Mortgages, Jumbo Mortgages, and FHA Insured Loans… What Does This All Mean?

These are all American concepts and either doesn’t apply or these are known by other names in the Australian market.

At NBS Home Loans, we’ll talk you through the mortgage types that are available to you to keep things simple and help you make an informed choice.

Call us on 0434 103 326 and we can answer questions or go through things with you.

Thanks For Recommending NBS Home Loans!

As a small business, we rely largely on word of mouth referrals. In fact, around 70% of the new clients we see each year were referred to NBS Home Loans by our existing clients.

If you have an existing loan with NBS Home Loans and you refer a new friend or family member to us, and your friend or family member successfully settles a loan of $250,000 or more with us by 31 January 2022we’ll send you a $500 gift card to say thanks for the referral. (Additional conditions apply, including a limit of one gift card per referrer per new client, so please contact us for more info.)

WHAT OUR CLIENTS ARE SAYING

Marty went beyong his role in helping us to get our Mortgage across the line during COVID in August 2020. He was 100% accurate with his assessment of the borrowing power and gave us the best options to suit our needs. If you wnt an honest Broker who cares for his customers, dont go looking anywhere else.

Robert Pellicano

NBS Home Loans Client

Financial Hardship Resources And Contacts

We understand this is a difficult time for many of our clients, friends and family. We have compiled the below list of financial hardship contacts and resources for anyone who may find them helpful.

Lenders’ Hardship Contacts

For additional information and to be directed to the relevant section of each lender’s website, please visit this page on our website: https://www.nbshomeloans.com.au/financial-resources-hardship-contacts-covid-19-australia

 

ANZ: 1800 351 548

Bank of China: 1800 095566

Bank of Queensland: 1800 079 866 or CustomerAssistanceTeam@boq.com.au

Bankwest: 1300 787 144

Bluestone: 13 25 83

CBA: 1300 720 814 or customerassist@cba.com.au

Connective HL: 1300 543 558

Connective Solutions: 13 73 77

ING: 1300 349 166

Latrobe: 13 80 10 or hardshipassist@latrobefinancial.com.au

Macquarie: 1300 363 330

ME Bank: 13 15 63

MyState: 138 001

NAB: 1800 701 599

Pepper: 1800 356 383

St George: 1300 303 110

Suncorp: 1800 225 223

Virgin Money: 1800 701 997

Westpac: 1800 067 497

 

Additional Support Resources

Lifeline: 13 11 14

Suicide Call Back Service: 1300 659 467

Beyond Blue: 1300 224 636

Mental Health Line: 1800 011 511

Kids Helpline: 1800 551 800

MensLine Australia: 1300 789 978

GriefLine: 1300 845 745

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