Pre-approval, a refinance and a rate locked in before the next rise
A family renting in the Eastern Suburbs while owning an investment property in Randwick. They wanted a home of their own, and they wanted it while rates were still moving.
The situation
Our clients were a couple with two young children, both PAYG employees. They had done what a lot of Eastern Suburbs families do. They bought an investment property in Randwick first, then kept renting nearby while the property did its work. With the kids getting older, they wanted a place of their own to live in.
Two things needed to happen, and they needed to happen together. They needed pre-approval so they could bid with confidence, and they needed their monthly position to be more comfortable before they took on a second mortgage on a single household budget.
The sticking point
The existing investment loan was the constraint. It had been sitting with the same lender since the purchase, on a rate that was no longer competitive, and its repayment was being counted in full against their borrowing capacity. Every dollar of that repayment was a dollar they could not put towards the home they actually wanted to live in.
Rates were also rising at the time. That created a second problem. A fixed rate quoted at application can move before settlement, and on a purchase that had not even happened yet, the gap between the two could be significant.
What we did
We refinanced the Randwick investment loan to a sharper rate first, which reduced the repayment and freed up monthly cashflow. That improved position then fed directly into the pre-approval assessment for the new purchase.
With pre-approval in place, they went to market knowing their number. They found an apartment in Kensington, close to schools and a short drive from the investment property, and their offer was accepted.
On the new owner-occupied loan we fixed the rate for two years and applied the lender's rate lock at application, with the fee deducted from the loan proceeds at settlement rather than paid up front. That held the quoted rate through to settlement, so the rate on the loan documents was the rate we had shown them at the start, not whatever the lender was offering weeks later.
The result
Total lending of $1.062 million across both properties, comfortably under 70% LVR, so no lenders mortgage insurance anywhere in the structure. The investment loan is on a better rate with more cashflow left over each month, and the family is in their own home in Kensington.
The part they mention most is the certainty. For the next two years they know exactly what the repayment on their home is, which makes planning around two children considerably easier.
Why rate lock matters when rates are rising
When you apply for a fixed rate loan, the rate you are quoted is not usually the rate you get. Most lenders set the fixed rate at settlement, which can be six to twelve weeks after you applied. If the market moves against you in that window, you settle on a higher rate and there is nothing you can do about it.
Rate lock closes that gap. For a fee, typically a flat charge or a small percentage of the loan, the lender holds the quoted rate for a set period, commonly 60 to 90 days. Lenders handle that fee differently. Some ask for it up front and others take it out of the loan advance at settlement, but the borrower pays it either way, so it needs to be built into the funding position from the start. When rates are flat or falling it is often not worth paying for. When rates are climbing, as they were here, it is cheap insurance.
It is also worth sequencing a refinance and a pre-approval together rather than one after the other. Reducing the repayment on an existing loan lifts the borrowing capacity that the new application is assessed on, so the order these are done in changes the outcome.
Rate lock and pre-approval, answered
A rate lock holds the fixed rate quoted at application, usually for 60 to 90 days, so the rate that applies at settlement is the rate you were shown rather than whatever the lender is offering on the day. Without it, the fixed rate is set at settlement, which can be weeks or months later. Most lenders charge a fee for it, either a flat amount or a percentage of the loan. Some ask for it up front and others take it out of the loan advance at settlement, but you pay it either way, so it belongs in your cost estimate from the start. In a rising rate market that fee is often recovered many times over.
Yes, and there is often a good reason to. Refinancing an existing loan can reduce your repayments, which improves the borrowing capacity the pre-approval is assessed on. The order matters, so both applications need to be planned together rather than run separately, and the lender assesses your whole position either way.
Yes. Owning an investment property while renting is a common position, sometimes called rentvesting. The existing loan and the rental income both form part of the assessment, so the structure of that loan has a direct effect on how much you can borrow for the home you want to live in. Reviewing it before you apply is usually worthwhile.
Renting while you own an investment property?
Shane will review the loan you already have and work out what it needs to look like before you buy the home you want to live in. $0 brokerage fee.
This case study describes a real loan we arranged, anonymised. Every situation is different and past results are not a guarantee of what a lender will approve for you. Fixed rates, rate lock fees and lock periods vary between lenders and change over time. The information on this page is general in nature and does not take your objectives, financial situation or needs into account. See our disclaimer for more.