WHAT IS RATE LOCK?
It is an option the client can choose when applying for a fixed rate loan.
The lender will charge a rate lock fee.
The interest rate the client applied for is locked in, so they are not affected if rates move before the loan is advanced.
How does it work?
Most people shop around for a great loan package with low interest rates, before they commit to a mortgage. Yet they don’t know that they get the interest rate on offer when their loan is advanced, not the rate at the time that they apply.
For example, XYZ Bank has a fixed rate home loan at 4.00%. Before settlement, this rate could rise to 5.00% or fall to 3.50%. If your client didn’t choose to rate lock the loan, then they will receive the interest rate on the day that their loan is advanced.
With rate lock, if the rate dropped to 3.50% then most lenders would allow them to have thelower rate, but if rates increased to 5.00% then they would be protected and would pay only 4.00%.
Some lenders do not allow the benefit if the interest rate falls before settlement, they only protect the client if the rate increases. So choose the lender carefully.
When will the rate lock begin?
This depends on the lender that clients apply with. Some lenders will lock the rate:
From the date of application.
From the date that the rate lock fee is paid.
At the time of approval.
If the right lender is not chosen, clients may end up paying a high interest rate! Not all lenders work the same way.
How long will the rate lock be in effect?
Each bank has a different time period for rate lock. Some banks will lock the rate in for 60 days, others for three months.
If the loan application is complicated, it is advisable that the rate is locked in for the maximum possible period. This way clients are covered if approval takes longer than anticipated and rates rise in the meantime.
Is there a rate lock fee?
Most lenders will charge clients a fee for the rate lock feature. The actual fee amount varies from lender to lender.
Some charge a set fee, whilst others calculate the fee as a percentage based on the amount that
you are borrowing. Below are the fees from some lenders:
Lender A: $750 for loans up to $1,000,000 fixed for up to 5 years.
Lender B: $450 or 0.15% of the loan amount, whichever is greater.
Lender C: 0.15% of the loan amount.
Should my Client Rate Lock?
Tips for locking in the interest rate
Do the research: Speak to all the banks and lenders to make sure that your client can get the best rate lock feature for an extended period with no fees.
Have all clients documents ready: This way you can quickly submit the loan application after the rate has been locked in. This minimises the possibility that the rate lock period will lapse, and client may end up paying a higher market interest rate.
Communication: With your client, to ensure the application can be lodged with the bank quickly.
Check the term of the rate lock-in: So that you can make sure the application is on its way to being approved before the rate lock lapses.
Does fixed term matter?
The rate lock fee is the same for a one-year fixed rate and a five year fixed rate.
Yet a 0.1% change in rate before settlement will cost clients 0.1% with a one year fixed rate and 0.5% with a five year fixed rate.
That’s why rate lock isn’t as beneficial for short term fixed rates. While for a three- or five-year fixed rate it is highly recommended.
Disadvantages of a rate lock
Although a rate lock option is great for borrowers who want the added certainty of having a stable fixed interest rate, there are some downfalls as well:
• Most lenders charge fees to rate lock.
• If clients have locked in and the rates then drop, clients may be charged the higher
(original) rate by some lenders.
• The rate lock fee may not be refundable if your loan gets declined.
Who can rate lock?
A rate lock-in is available to:
New home loan applicants: If you are about to apply for a fixed rate home loan, you can choose the rate lock option as part of your loan package.
Refinancing: If you are looking to re-finance your existing loan, you can apply for a rate lock-in.
Act quickly!
It’s always hard to pick the right time to lock in the rate. However, a rate lock is highly recommended if interest rates are increasing.
Most lenders lock in the rate from the date that they receive the loan application. However, if the loan application is incomplete then it can’t be lodged it with the lender. How do you know if rates are increasing?
If a couple of banks have just increased their fixed interest rates, then this is a good indication that the other banks are under pressure from higher funding costs and may make similar changes. In these cases you must act quickly to lodge your application.
Rate lock or rate quote?
These are two very different things!
A rate lock is an agreement to lock in a specified rate.
A rate quote is generally provided by the banks when your loan has been approved. This is just a quote of what the interest will be. It is not a commitment by the lender to offer you that rate.
As both are entirely different, it is best that you clarify exactly what it is you are entering into.
Get your rate lock in writing!
In most cases, you will be exposed to a rate rise unless you get the formal rate lock approval in writing.
A rate quote or a verbal agreement is not actually legally binding. Seek a ‘loan-commitment letter’ from your bank to ensure that you are locking in your low rate.
Please having the discussion with your clients about the rate lock especially if they have a Fixed Rate portion and keep detailed notes on file whether the client has accepted the rate lock or has declined the rate lock option.
If Interest rates do go up and the client declined the rate lock, you have the details with regards to the conversation that you have had with them.
Make notes within the SOCA about the rate lock discussions and the client's decision. Your client signs the SOCA.
Disclaimer: This information is current as at the time of each QRG publication. It is a general information guide only.