Rate Lock-ins and Break Costs: What First Home Buyers Need to Know

What Are Rate Lock-ins?

When you're going through your first home loan application, you'll hear mortgage brokers talk about 'locking in' your interest rate. But what does this actually mean for you as a first home buyer?

A rate lock-in is essentially a promise from your lender to hold a specific interest rate for you, even if rates change before your loan settles. This can be particularly valuable in a rising interest rate environment, giving you certainty about what your repayments will be.

Most lenders in Australia offer rate lock-ins for periods ranging from 90 to 180 days. This timeframe usually covers the period from when you apply for a home loan through to settlement. For first home buyers in Gosford, this can provide real peace of mind while you're finalising your purchase.

How Rate Lock-ins Work in Practice

Let's say you've found your dream home and received pre-approval with a fixed interest rate of 6.0%. You lock in this rate when you submit your full home loan application. If rates increase to 6.5% before settlement, you'll still get the 6.0% rate you locked in. That's the upside.

However, if rates drop to 5.5%, you're generally still committed to the 6.0% rate. Some lenders may allow you to relock at a lower rate if it drops, but policies vary, and there might be conditions attached.

Here's what you need to know about rate lock-ins:

• They typically apply to fixed interest rate products, not variable interest rate loans
• The lock-in period starts when you formally lock the rate with your lender
• If settlement takes longer than your lock-in period, you may need to accept the current market rate
• Not all lenders charge for rate lock-ins, but some do
• You can usually lock in a rate even with a 5% deposit or 10% deposit under schemes like the First Home Loan Deposit Scheme

Understanding Break Costs

Now, let's talk about break costs - something many first home buyers don't think about until it becomes relevant. Break costs are fees you might have to pay if you exit a fixed-rate home loan before the fixed term ends.

Think of it this way: when you lock in a fixed interest rate, your lender is committing to that rate based on their own funding costs. If you break the contract early, and interest rates have fallen in the meantime, the lender loses money. Break costs compensate them for this loss.

When Do Break Costs Apply?

You might face break costs in several situations:

1. Selling your property before the fixed term ends
2. Refinancing to another lender or product
3. Making large extra repayments beyond what your loan allows (some fixed loans allow up to $10,000-$30,000 in extra repayments per year)
4. Switching from a fixed to variable interest rate with the same lender

It's worth noting that features like an offset account or redraw facility are often limited or unavailable with fixed-rate loans, which is something to consider when choosing between fixed and variable options.

How Break Costs Are Calculated

Break costs aren't just a flat fee - they're calculated based on several factors:

• The difference between your locked-in rate and current market rates
• How much time remains on your fixed term
• The amount you're paying out
• The lender's funding costs

If interest rates have risen since you fixed your rate, you might not have any break costs at all. In fact, in a rising rate environment, there could be no penalty. However, if rates have fallen, break costs could run into thousands or even tens of thousands of dollars.

For first home buyers working with programs like the Regional First Home Buyer Guarantee or receiving first home owner grants (FHOG), it's crucial to factor these potential costs into your first home buyer budget.

Making the Right Choice for Your Situation

When you're buying your first home in Gosford, deciding between a fixed interest rate and variable interest rate isn't just about current rates - it's about your plans and circumstances.

Consider fixing your rate if:

• You want certainty about your repayments for budgeting purposes
• You believe interest rates will rise
• You're planning to stay in the property for the fixed term
• You won't need to make large extra repayments

A variable rate might suit you better if:

• You want flexibility to make unlimited extra repayments
• You want access to features like offset accounts
• You might sell or refinance within a few years
• You want to benefit from any interest rate discounts that become available

Questions to Ask Your Mortgage Broker

Before committing to a rate lock-in or fixed-rate product, discuss these questions with your broker:

• What is the lock-in period, and what happens if my settlement is delayed?
• Are there any fees for locking in the rate?
• How are break costs calculated with this lender?
• What flexibility do I have for extra repayments on a fixed loan?
• Can I have a split loan (part fixed, part variable)?
• What features am I giving up by choosing a fixed rate?

At Coco Finance Broking, we help first home buyers in Gosford understand all their home loan options, including the ins and outs of rate lock-ins and break costs. We'll walk through your first home buyer checklist with you, discuss your eligibility for first home buyer stamp duty concessions, and help you understand low deposit options including gift deposits.

Whether you're looking at your first home loan or need help understanding how Lenders Mortgage Insurance (LMI) works, having a mortgage broker who knows the local Gosford market can make a real difference to your experience.

Understanding rate lock-ins and break costs is just one part of buying your first home, but it's an important one. These features can either protect you or cost you money, depending on your circumstances and how interest rates move.

Call one of our team or book an appointment at a time that works for you. We're here to help you make informed decisions about your first home loan application and find solutions that work for your situation.