0.15% Rate lock fee-Nab 3.88% fixed 2yr P&I: worth it?

We are in the process of refinancing to Nab and they have the option to lock the rate for a fee of 0.15% of our balance. It means paying $1655 so we don't (potentially) have to pay higher rate if they change them between submitting application and settlement. This is a gamble, who knows the odds?

 

The bank has worked out what it thinks the risk is and created a market for what they are prepared to remove that risk for you - if you are refinancing it shouldn't be a long period between application and settlement.

If I've worked this out correctly you are refinancing over $1.1m - the rate lock fee would cost you the same as what a shift in interest rates upwards might be.

Is it variable or fixed interest? If variable I wouldn't be inclined to pay as you would pay as much to lock the rate as what you would be charged in interest over the year. If a fixed interest rate for a couple of years it might be worth locking that rate in.

Ultimately it's up to you as to how material a rate change would be and what you are prepared to pay to remove that risk. What would be material to me might not be material to you.

 

@Martin73 Thanks for your reply.

Yes, just a couple of thousand over 1.1m Point taken. Fixed for 2 years as stated in the post title.
What I really need is an apples/apples comparison. How would I work out the interest rate increase needed for me to pay an extra $1655 over two years? If I can do a few estimates with say, 0.1, 0.2,0.3% increases, then determine if that is more than $68pm that the lock fee would equate to (1655/24=68).

I know settlement shouldn't take too long, but I have refinanced from ING to Westpac 3 months ago and that took 2 weeks. I just have a feeling we may get a nasty sting come 31st August, you know, Murphy's law. I don't want that to happen.

And @Rolf Latham you were too quick for me to post this reply, thank you for your comment.

 

@Rolf Latham Did you mean rate lock?

 

The cost should equate to 0.075% p.a. (i.e. 0.15% rate lock fee/2, as its paid once for the 2 year period). That is, if rates move above 3.96% your better off paying the rate lock fee. If rates change it will likely be much more than this. Westpac had a ~0.31% jump in this product a while ago. No news from NAB yet, but its very difficult to accurately predict individual lender pricing decisions.

 

That was a perfectly clear explanation @Redom It does point me towards paying the rate lock if I was risk adverse and not pay it if I was comfortable with the rates increasing by the approximate 0.3% as Westpac demonstrated.
Many thanks

 

Now that you point that out....

Using the solver function in Excel:

$ 1,100,000.00
3.96% $ 43,560.00
4.04% $ 44,387.50 $ 1,655.00

If interest rates rise more than 0.08% before settlement you would have been better off paying the rate lock fee.

 

Since you pointed that out it's quite delightful when we are in total agreement

 

Last time I checked, the NAB rate lock fee is 0.10%. Has it changed recently?

Regardless of this, if rates do increase, it will likely be by a lot more than the rate lock fee and it would be money well spent. If settlement is next week, probably not worth it. If settlement is in a few months, it probably is worth it.

As for the survey question of a tax variation, if you use a variation you'll probably spend the money from one month to the next never knowing where it went. If you claim it all at the eofy, you'll get a lump sum to do something useful with.

 

Rate lock is simply a form of gambling and what to do depends solely on your risk appetite.

On a refinance and given that great rate is only for 2 years, me personally I would probably let it ride as the reward is more valuable than the downside.

 

Rate lock fee may differ depending on which broker you use perhaps? I am not privy to the fees and charges of most banks let alone nab, first time hearing of a rate lock fee but it may be a necessary evil for some, probably we will dodge a bullet this time.

Tax variation: a bold statement to assume that one may have impaired financial judgement and ignorance of 'not knowing where it went'. I would tend to counter that with it it is also likely to be beneficial for alert investors to resign that extra cash into an offset account or similar so that it may lay in wait to buffer interest rate rises, pay down non-deductible debt quicker, just be there in case of an emergency. Everyone knows you need a buffer, just waiting for that at the end of the year(as I have done for many years) seems backward to me since I have a better use for it: improving cash flow.
I have asked my accountant to start the variation this fy so we will wait and see how this goes.
@Peter_Tersteeg your feedback is appreciated, thank you

 

Rate lock fees don't differ from one person to the next. That said, I could be thinking of Westpac with 0.10%? I don't have my resources as easily available out of the office. It doesn't make a huge difference anyway as I expect a rate rise will make any percentage based rate lock fee economical.

Let's face it, if you give 90% of people a 1%-2% salary increase, it will be absorbed into their daily expenses even when they do watch their spending. Some people do track every cent, but the majority of people don't. It's not a matter of impaired financial judgement, it's just human nature. If you can save the extra cash flow of course it's better off in your pocket than having the ATO hold it for you.

 

Different lender have different rate lock fees.
Westpac is 0.10%, NAB is 0.15%. CBA $750.
Standard fees between brokers - they don't usually negotiate on these either.

 

Clarification noted. Thanks @Redom ☺️

 

We're seeing a number of lenders pushing their fixed rates up at this time - so it can be of value to get a rate lock - especially if a longer term lock where the effective fee is diluted over the fixed term.

WBC, Heritage and others and have all jumped up their rates quite significantly - and it's not likely the disparity in rates will stay at this level for much longer. Weigh it up - whether you're happy with a guaranteed rate with the rate + lock fee, or taking a punt that you will settle before the music stops.

 

@Corey Batt thanks for your perpctive, hopefully no fat lady singing before settlement, we are gambling this time

 

Lock the rate. 3.88% wont stay around very long. These types of sharp fixed rates are always a 3-4-5 week campaign...rarely much longer.