A lock-in period is a critical part of your home loan agreement, yet for some people, there’s a risk that they’re treating it as an afterthought.
Understanding what this means, and how it impacts you is an important part of choosing the right housing loan for your circumstances.
So what exactly is this ‘lock-in period’, what are the rules of escape, and what can you do about it if you’re trapped?
It’s not as scary as it sounds, we promise! Here’s everything you need to know about the lock-in period.
What Is The Meaning Of A Lock In Period?
This term defines a period of time in which you’ll have to pay a penalty, if you somehow wish to end your home loan earlier than agreed.
That can mean you want to pay off the loan in full, refinance your loan, or even sell your property. The last one is where a lock-in period can be a particularly unwelcome surprise.
Imagine if you’re forced to sell off your property after only a year of getting it because of a sudden emergency, and you’re in desperate need of money.
Not only would the property not have enough time to appreciate in value, you’d be forced to pay a penalty fee which can sometimes be a large sum!
The terms and conditions will state clearly the period of time covered under this clause. That means if you exit the agreement during this time, you WILL be required to pay the penalty fee.
Now, that period typically begins from the day that the bank issues the first loan payment on the loan agreement.
The actual term of the lock-in period can vary between home loans from different lenders, but is typically around two to five years.
How Much Is The Penalty Fee For A Lock In Period?
Penalty fees, like the duration of the term, can vary, but are typically between 2% and 5% of the outstanding loan amount.
Say you buy a home for RM510,000 in 2019. In 2020, you need to sell it for personal reasons. You could be talking UP TO 5% of that outstanding loan amount for a penalty fee!
Let’s assume that you’ve already been making regular loan repayments, and your outstanding loan amount is RM500,000:
- RM500,000 with a 2% penalty fee means a total penalty amount of RM10,000
- RM500,000 with a 5% penalty fee means a total penalty amount of RM25,000
That’s a big difference to consider, and a very painful hit on the pockets!
How A Lock-In Period Impacts Your Loan
The difference between two and five years can be pretty substantial when it comes to something like home ownership.
Circumstances can change, whether that’s a new family member joining you, or a change in your finances necessitating a move.
Want an even clearer picture as to why the lock-in period is something you’d want to pay attention to? Let’s run through a simple example.
You’ve bought a shiny new one-bedroom condo unit in Sentul, KL. A few years later, things are looking great, you’ve just got married, you’ve both had promotions, and there’s a kid on the way!
Suddenly, you’re looking for a new home with extra rooms and space. If your lock-in period is only two years, you’re probably going to be alright.
If your lock-in period is five years, you’re potentially looking at a maximum 5% penalty on the outstanding value of your loan.
That can significantly impact your financial freedom to purchase a new home.
It’s not just unforeseen life events that dictate how a lock-in period impacts your loan. If home loan rates fall, refinancing can sometimes offer a particularly lucrative opportunity to save money.
If your lock-in period means you’ll pay a five-figure penalty for the switch, that option then becomes far less attractive.
What Can You Do About A Lock In Period For A Housing Loan?
Well, we know! First of all – pay attention to the terms and conditions on your loan agreement! This should be obvious when talking about a financial obligation like a home loan, but it’s worth stressing.
The mortgage lock-in period is not some random clause for fun, it’s a serious consideration for anyone choosing a loan.
If you’re assessing two potential home loans with similar interest rates and terms, then check to see if the lock-in period might tip the scales.
If you’ve got two loans that look the same, but one has a lock-in period of two years and the other has five years, then the smarter choice is taking the shorter lock-in period.
Of course, the penalty is only ever applied in cases where you absolutely need to end that home loan early.
So, there’s no need to worry that the bank is suddenly going to hit you with a 5% charge. It only occurs when you’ve triggered it!
Can You Find A Housing Loan Without A Lock In Period?
Yes you can, but you’ll REALLY have to hunt them down! The reason behind the lock-in period existing is to cover the rather substantial administration costs of organising a home loan.
Anyone who has bought a house will tell you just how much paperwork there is! That doesn’t even include things like banks paying property valuers and other resourcing needs.
The lock-in period is designed to ensure that a financial institution receives a fair financial return for their own resources put into offering a home loan.
If you jump ship without a period of loan repayment and interest paid, they impose that penalty to ensure those costs are covered.
Just like we said you shouldn’t overlook the lock-in period, you shouldn’t become obsessed with the lock-in period over other equally important terms and conditions.
A home loan is about a complete package that works for you, from term, interest rate, and lock-in period. If you’re ever in doubt, the best thing to do is speak to a professional!
Find out everything you’d need about housing loans with our comprehensive guide: What You Should Know Before Applying For A Housing Loan In Malaysia