First Home Buyers Guide to Rate Lock-ins and Break Costs

What Are Rate Lock-ins?

When you're preparing to apply for a home loan as a first home buyer, you'll come across terms like 'rate lock-in' and 'break costs'. These concepts might sound confusing at first, but they're important to understand before you commit to your first home loan.

A rate lock-in is essentially a promise from your lender to hold a particular interest rate for you, even if rates change before your loan settles. This can be particularly valuable in Brisbane's property market, where you might find your dream home during a time when interest rates are favourable.

Most lenders offer rate lock-ins for a specific period, typically ranging from 90 days to six months. This gives you time to complete your property purchase while knowing exactly what your repayments will be.

How Do Rate Lock-ins Work for First Home Buyers?

When you receive pre-approval for your first home loan, you might have the option to lock in your interest rate. Here's what typically happens:

1. You discuss your home loan options with your mortgage broker
2. You receive an approved home loan application with a quoted interest rate
3. You choose to lock in that rate for a specified period
4. Your rate remains fixed during the lock-in period, regardless of market movements
5. Once settlement occurs, your loan begins with the locked-in rate

It's worth noting that rate lock-ins usually apply to fixed interest rate loans rather than variable interest rate products. If you're considering a fixed rate home loan, this feature can provide certainty about your first home buyer budget.

The Cost of Locking in Your Rate

Some lenders charge a fee to lock in your rate, while others offer this service without upfront costs. At LBK Lending, we can help you understand which lenders in Brisbane offer the most suitable rate lock-in terms for your situation.

The cost can vary depending on:

• The length of the lock-in period
• The type of loan you're applying for
• Whether you're using low deposit options like a 5% deposit or 10% deposit
• Your lender's specific policies

Understanding Break Costs

Now, let's talk about break costs - something every first home buyer should understand before choosing a fixed interest rate loan.

Break costs are fees you might need to pay if you exit your fixed rate loan before the fixed term ends. These costs exist because when you lock in a fixed rate, the lender makes financial arrangements based on that commitment.

If you decide to:

• Sell your property and pay off the loan early
• Refinance to another lender
• Switch to a variable interest rate
• Make large additional repayments beyond what your loan allows

You might trigger break costs.

How Are Break Costs Calculated?

Break costs aren't just random penalties - they're calculated based on specific factors:

1. The difference between your fixed interest rate and current market rates: If rates have dropped since you locked in, the lender loses money when you break your contract
2. How much time remains on your fixed term: More time remaining typically means higher break costs
3. Your remaining loan balance: The amount you still owe affects the calculation
4. Wholesale funding costs: What it costs the lender to manage the early exit

In some situations, break costs can be substantial - sometimes reaching tens of thousands of dollars. However, if interest rates have risen since you locked in your rate, your break costs might be minimal or even zero.

Features to Consider That Affect Break Costs

When comparing home loan options, consider these features that can give you flexibility:

Fixed Rate Loans with Limited Additional Repayments: Many fixed rate loans allow you to make extra repayments up to a certain amount each year (often $10,000 to $30,000) without triggering break costs. This can help you pay down your loan faster while maintaining some flexibility.

Offset Account Options: Some lenders offer offset accounts even with fixed rate loans. While less common than with variable interest rates, this feature can provide savings without technically breaking your fixed rate contract.

Portability: Some loans allow you to transfer your fixed rate to a new property if you sell and buy again during the fixed period, potentially avoiding break costs.

Making the Right Choice for Your Situation

As a first home buyer in Brisbane, understanding these concepts helps you make informed decisions about your first home loan application. Consider your plans for the next few years:

• Do you anticipate needing to sell or refinance?
• Will you receive additional funds (like a bonus or inheritance) that you'd want to put towards your loan?
• Are you planning renovations that might require additional borrowing?
• Is your employment situation stable?

If you're accessing first home buyer grants, first home owner grants (FHOG), or first home buyer stamp duty concessions, you'll want to ensure your loan structure works with these benefits. Programs like the First Home Loan Deposit Scheme or Regional First Home Buyer Guarantee can help you get into the market sooner, and understanding rate lock-ins and break costs helps you choose the right loan structure.

Getting Professional Guidance

Working through your first home buyer checklist can feel overwhelming, especially when dealing with concepts like Lenders Mortgage Insurance (LMI), interest rate discounts, and now break costs. This is where having an experienced mortgage broker becomes valuable.

At LBK Lending, we work with first home buyers across Brisbane to explain these concepts in plain language. We can help you understand:

• Whether a fixed or variable interest rate suits your circumstances
• How rate lock-ins might benefit your purchase timeline
• What break costs could apply to different loan products
• How features like redraw and offset accounts work with different loan types
• Your first home buyer eligibility for various government schemes

We'll also help you understand whether low deposit options, including those available through the first home super saver scheme, align with your goals and how they interact with fixed and variable rate products.

Remembering that your loan needs to work for your lifestyle and plans, not just for the day you settle. Understanding rate lock-ins and potential break costs ensures you're making decisions that support your financial future.

Call one of our team or book an appointment at a time that works for you. We're here to help Brisbane first home buyers understand their options and find a home loan that fits their needs. Visit our First Home Buyers page for more information, or book an appointment with our experienced team today.