What is a mortgage rate lock and when is it useful?

Banks can shift their mortgage rates several times throughout the year, either in response to moves by the Reserve Bank of Australia (actual or anticipated), or simply because their cost of doing business has changed.

To protect against any interest rate hikes, many borrowers opt to fix their loan. While this ensures your rate stays the same during the fixed rate period, there's still a chance it will change prior to that. A rate lock can keep that from happening.

“With fixed rates going up so fast nowadays, a rate lock can be a really useful tool for borrowers,” says Mozo’s banking expert Peter Marshall.

“There's a fee, usually in the hundreds of dollars, but if you think about how much money you could save by paying the lower interest rate over several years it can end up being much cheaper than taking your chances.”

Say you spot a home loan with an attractive fixed rate. You contact the bank, submit an application, and are approved for the loan. Settlement doesn’t take place overnight, however, and in the time it takes for the bank to finalise your loan and advance your funds, interest rates might have gone up.

Even a small increase can make a big difference over time. On a $600,000 loan with a 3-year interest rate of 2.50% p.a, borrowers would be paying around $2,690 per month. If the interest rate jumped up by 0.25% p.a., it would amount to an extra $2,772 over three years.

A rate lock gets around this problem by letting you lock in the fixed rate offered at the time of approval. Though you’ll have to pay a fee, you’ll have the peace of mind of knowing you won’t lose out on that low interest rate that attracted you in the first place.

While some lenders will offer a rate lock free of charge, in most cases a fee will apply. This will need to be paid before the drawdown of the loan, and might take the form of a flat fee or a percentage of the loan balance. 

For an idea of how fees are priced, this is what rate lock fees from the major banks look like at the time of writing:

• ANZ: $750 per $1 million of lending

• CommBank: $500 (from 1 February 2022 to 30 September 2022, otherwise $750)

• NAB: 0.15% of the loan balance

• Westpac: 0.10% of the loan balance

Rate locking is generally a good idea when interest rates are trending upwards. But banks don’t really publicise when they lift rates, for obvious reasons. Our home loan statistics page can help give you an idea of where rates are currently heading. 

Another thing to keep in mind is that a rate lock might not be so beneficial on shorter terms. That’s because if you’ve fixed your loan for one year, an increase of 0.25% p.a. would just cost you an extra 0.25% over the term. On the other hand, a similar sized increase on a five year fixed loan would cost an extra 1.25% over the term.