What is a rate lock and what happens if it expires before your home loan closes? 

What happens if you’ve negotiated a good home loan deal, but your lender’s interest rates go up right before settlement? In many cases, you’d be stuck with the new rate. However, you can protect against this risk using a method called rate lock. When you choose to lock in your interest rate, your home loan will not be impacted even if the interest rate changes before the loan amount is disbursed. 

However, locking in your loan can backfire if the interest rate drops before closing, which could leave you paying a higher rate than other borrowers. It is therefore worthwhile to do a bit of research about the market beforehand, know your options and make an informed decision. 

How does rate lock work?

While shopping for a home loan, you’re probably looking for the best deal you can get, in terms of low interest rates and fees. However, you may not know that the interest rate that you’re offered actually applies when the loan is processed in many cases, not at the time you apply. 

For example, if you choose a home loan at an interest rate of five per cent when you apply, the rate may rise to 5.3 per cent or fall to 4.7 per cent before settlement. In many cases, you will be offered the interest rate the lender offers when your loan is disbursed unless you choose to rate lock your loan. 

Using the same example, if you have locked your loan and the rate drops to 4.7 per cent, some lenders may offer the lower rate or you may miss out. On the other hand, if the rate increases to 5.3 per cent, you’ll be protected and will only have to pay five per cent. 

Before locking your rate, it’s worth confirming with your lender if they’ll reduce the interest rate if it falls before settlement. 

When should you lock your loan?

While locking the interest rate on your mortgage is certainly not essential, you could consider doing it if you’re expecting your loan approval to take a while or if you expect rates to increase while you are waiting. 

When does rate lock start and end? 

The starting time of your rate lock depends on the lender you choose. For example, some may place a rate lock on your loan on the date you apply, while others will only put the lock after you pay the fees. It’s a good idea to clarify the exact start date with your lender to ensure you don’t pay a higher interest rate. 

The end date or termination of a rate lock also varies from lender to lender. While some lenders might offer you 60 days, others might extend the period to three months. 

What happens if the mortgage rate lock expires before closing?

Most lenders will give you an option to extend your lock if it expires before the loan is processed, even if the rates have risen. You may have to pay a fee to add a week or two to your rate lock period. 

You could also consider re-locking your loan at the same rate if you’re sure it won’t close before the lock is terminated. For example, if you locked your mortgage for 30 days, and halfway through, you realise that it’ll take at least 40-45 days for the loan to close, you might be able to relock the same loan with a new 30-day period. If the rates haven’t changed drastically during this time, some lenders will let you relock your loan at no extra cost. 

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