‘Locking In’ Mortgage Rates: What Is the Catch?

A mortgage rate lock, also known as lock-in, is the lender’s approval to provide a home loan at a certain fixed interest rate for a certain amount of fee. This means that within the lock-in period, any fluctuations in the current market’s interest rate will not affect the rate at which you are getting your mortgage. Your home loan’s interest rate becomes locked or fixed for that particular time frame. A mortgage rate lock protects you from soaring mortgage rates while your home loan application gets processed. The lock-in period may range from 15 to 60 days.

What are the advantages of ‘locking in’ an interest rate?

If you don’t lock-in an interest rate, you will be completely at the mercy of mortgage market where interest rates rise and fall at the blink of an eye. In other words, a 6% interest rate may rise to 6.5% while your loan application goes from initial processing stage to final approval stage. So, the final interest rate for your home loan will be 6.5%. Due to this, you may have to shell out cash so that your monthly installments are aligned. This adds to your home loan costs.

If you lock an interest rate, the risk due to market fluctuations is transferred to the lender. In such a scenario, if interest rates increase then the lender is at risk of losing potential profit. As a mortgage rate lock eliminates chances of ending up with higher interest rates, it is a winning option for borrowers.

If interest rates go down when you are in the lock-in period, you cannot take its advantage unless you have taken a float-down provision. This provision allows you to relock your mortgage at a lower interest rate. As this is more risky to the lender, float-down option is costlier than lock-in option.

What is a good time to ‘lock-in’ an interest rate?

It is a good practice to lock-in an interest rate as soon as it fits your requirements. Many people do it immediately after submitting their loan application. If you can hardly get your loan approved at today’s mortgage rates it would be wise to lock-in today as any further rise in mortgage rate will risk cancellation of your home loan.

A mortgage rate lock comes with a fee. If current market trends suggest falling interest rates, then you should lock-in once your home loan is approved.

The only disadvantage of having a mortgage rate lock is when interest rates fall down during the lock-in period. In this interval, you won’t have the luxury of getting a home loan at a lower rate. Also, you won’t know how much time your home loan application will take to get approved. If the lock-in period expires before approval, then you will have to contact lender for extending the lock-in period at additional costs.

Even with these disadvantages, it is always better to lock-in the interest rate because you never know when the rates may rise sharply. Some of the banks offering this facility include Bank of New Zealand, Westpac Bank and Kiwi Bank.