Why You Should Pay Attention To Lock-In Period On Home Loans?
Most home buyers do not put adequate importance on the lock-in period of their home loan package. It is not only an important aspect, it is also one of the six things you should consider when taking up a home loan in Malaysia. If you’re actively searching for a housing loan right now, allow us to offer a more in-depth explanation on why you should avoid a lengthy one, as well as answer a question many are asking: Is it possible to secure a home loan with no lock-in period in Malaysia?
What is it?
For the uninitiated, a lock-in period refers to the length of time where you’ll incur an exit penalty should you choose to pay off your home loan in full (by full settlement, refinancing or sale). In Malaysia, it could be anything from three years up to five years or more, while an exit penalty could start from as low as 2% all the way up to 5% of your original loan amount. Take note that lock-in periods are usually counted starting from the first drawdown (i.e. the day the bank issues the first payment to the developer), and not from the date the legal agreement is signed.
Example: If you have a RM500,000 housing loan with a lock-in period of five years and an exit penalty of 3% by choosing to pay off your loan in full any time during the five-year period, you’ll pay this amount to the bank as penalty:
Your penalty = 3% × RM500,000 = RM15,000
Why would it affect you?
Most property loan borrowers do not pay attention to lock-in period for two key reasons. Firstly, they may not understand what it is. And secondly, they do not think they will have the money to pay off the loan amount in full any time soon, thus rendering it irrelevant. However, even if you are 100% convinced you will not have the cash to pay off your loan in the near future; there are still many circumstances where it could affect you.
For example, you may suddenly decide to sell off your property, or you may opt to refinance either to take advantage of a better loan rate by another bank or to unlock your home equity. If these take place during the lock-in period, you will incur the exit penalty by virtue of you terminating your property loan during the said period.
What is a good strategy when it comes to it?
When choosing a property loan, it is for your best interest to keep the lock-in period as short as possible and the exit penalty as low as possible. If you can, try to look for home loan packages that do not have such term at all. Though the length of the period is important, do not let it jeopardise your home loan interest rate. If a bank offers you a loan package with zero lock-in period but at significantly higher interest rate compared to other home loans in the market, it is not considered a good deal (i.e. because in any loan, the interest rate should always be your priority).
Are there home loans with no lock-in periods in Malaysia?
The short answer is: yes. In Malaysia, there are actually a handful of banks that offer housing loans without such periods. They can be found on this home loan comparison table. For all housing loan applicants, make sure you check your Letter of Offer to ascertain the lock-in period and exit penalty before you sign. Remember: it’s better to be safe than sorry!