What Is a Rate Lock and Should You Use It?

When applying for a fixed-rate home loan, you may come across the option to lock in your interest rate for a certain period. This is known as a rate lock, and it can be a useful tool—especially if interest rates are expected to rise.

This article explains what a rate lock is, how much it typically costs, and whether it might be the right option for your home loan.

What Is a Rate Lock?

A rate lock allows you to secure the fixed interest rate offered by the lender at the time of your loan application. If interest rates increase between the time you apply and when your loan settles, your locked-in rate remains unchanged.

Most lenders offer a rate lock period of up to 90 days. It is typically only available for new fixed-rate loan applications, not when switching from a variable to a fixed rate later on.

How Much Does a Rate Lock Cost?

The fee for a rate lock varies depending on the lender. It is commonly charged either as a percentage of your total loan amount or as a flat fee.

Typical rate lock costs:

• Between 0.10% and 0.20% of the loan amount

• Or a flat fee, usually ranging from $500 to $1,000

For example, on a $525,000 loan, a 0.15% rate lock fee would be $787.50. Most lenders allow this fee to be added to your loan balance instead of requiring payment upfront.

Pros of Using a Rate Lock

Rate protection. You are protected from interest rate increases while your loan is being processed.Certainty in budgeting. You will know exactly what your repayments will be from the start.Peace of mind. You avoid uncertainty if rates are likely to rise soon.

Cons of Using a Rate Lock

The fee applies whether you use the lock or not. Even if interest rates stay the same or decrease, the fee is still charged. Limited time period. Most rate locks expire after 60 to 90 days. If your loan settles after that, you lose the benefit but still pay the fee. No refund if rates drop. If the interest rate falls before settlement, you will receive the lower rate, but you will still pay the fee.

What Happens If You Don’t Use It?

Without a rate lock, your interest rate will be determined on the day your loan settles. This means your rate could be higher or lower than the one available when you applied.

If interest rates increase before settlement, you will end up paying more.If interest rates fall, you will benefit from the lower rate without having paid a fee. You avoid the cost of the rate lock altogether, but you take on more risk.

Should You Use a Rate Lock?

Whether to use a rate lock depends on your situation and your comfort with interest rate movement.

You might choose to lock in your rate if you believe rates are likely to rise, if you want certainty in your repayments, or if you have secured a competitive fixed rate that you want to hold onto.

If you are confident that rates will remain steady or possibly decrease, and you are comfortable with the risk, then you may prefer not to use a rate lock and avoid the fee.

Final Thoughts

Rate lock options vary across lenders, including how long the lock lasts and how the fee is charged. Always check the specific conditions with your lender or mortgage broker.

If you would like help deciding whether a rate lock makes sense for your situation, feel free to get in touch.