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

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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.”

How does rate locking work?

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.

How much does it cost to lock your home loan rate?

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

When should you use a rate lock?

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.

Frequently asked questions

When does the home loan rate lock start?

Depending on the lender, the rate lock will either commence on the application date, once the rate lock fee is paid, or at the time of approval.

What happens if mortgage rates drop?

If interest rates fall after you secure a rate lock, many lenders will agree to move you onto the lower rate. However, you might not be refunded the rate lock fee. Make sure to contact your lender to confirm (and give them a nudge if necessary).

How long will it be in effect?

Again, this will differ across lenders. Some will offer a 60 day rate lock while others might be willing to go as high as three months. If you expect your loan to take longer than usual to process, opting for the longer option can give you greater peace of mind.

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Last updated 24 June 2024 Important disclosures and comparison rate warning*
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Niko Iliakis
Niko Iliakis
Money writer

Niko Iliakis is a finance journalist at Mozo specialising in home loans, property and interest rate movements. With an eye for facts and figures, Niko deep-dives into topics to help readers understand key info and make more informed financial decisions. He is ASIC RG146 (Tier 2) certified for general advice.

* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

^See information about the Mozo Experts Choice Home Loan Awards

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