While there is no denying that there are fees and charges for lock-in period clauses, it turns out that the ‘much warned’ lock-in clauses affect every home loan differently.
Understanding what a lock-in period clause means, how it impacts you, and the potential risks and benefits of it is an important part to answer the question, “how does a housing loan work?”. It’s not as scary as it sounds but treating it as an afterthought could be risky.
If you are in the process of applying for home loans and want to understand whether accepting a lock-in clause for a special promotional interest rate is worth the risk, this article might help you decide what is best for you.
The lock-in period clause suggests a specific period where the home loan borrower is “locked-in” with the bank as they enjoy a special promotional interest rate. The lock-in period can range from one to five years. Although most home loan packages today come with a lock-in clause of two to three years.
Based on the lock-in period clause, bank housing loans can have three basic variations:
The term ‘lock-in’ has a negative connotation, but why? The borrower trades off their right to switch to another bank (without penalty) during this period in return for the stability and convenience of the fixed rate offered.
If the borrower attempts to refinance or pay off the entire home loan early, i.e. during the lock-in period, they will need to pay a penalty fee to the bank.
Please note that although technically you can refinance at any time – even during the lock-in period – it is generally recommended to wait until this fixed period is over to keep penalties at bay.
The penalty costs vary between home loans, but in most cases, the typical penalty is 1.5% of the outstanding loan amount (minus any additional fees charged by the bank).
For example, let’s say you have a home loan of $800,000 with a 3-year lock-in period, for which you have already paid $200,000.
If you decide to refinance or pay off your entire home loan after the first year, then you might incur a penalty fee of $9,000 (1.5% of $600,000). By charging this lock-in penalty, the lender bank makes up for the interest it would lose on your home loan.
Can I save money by refinancing by bearing the lock-in penalty? you may ask. Well, the simple answer is NO.
More than 99% of the times, you will lose more money from breaking the lock-in clause than you would save by refinancing or paying early. Remember that you may also need to refund the initial legal or valuation fee subsidy offered by the bank at the time of taking the loan if you opt to refinance within the lock-in period.
Note that for a fixed rate home loan, you are by default ‘locked-in’ during the fixed rate period. This means if you take up a 3-year fixed rate loan, you are also locked in for all three years.
In a rising interest rate environment, if the interest rate increases by the end of the lock-in period, you have the option to refinance your loan again to a cheaper loan package.
Lock-ins are not universal and some home loan packages come with no such penalties. The common perception of lock-in clause in Singapore is that it limits prepayment options and imposes additional charges and penalties on homeowners, but the reality is, the restrictions aren’t always a bad thing.
It could be hard for you to believe your mortgage broker telling you to go with a home loan package with a lock-in clause.
Why would anyone accept a lock-in clause in their home loan which stops you from selling your home or charge a penalty for refinancing into something cheaper or paying your loan early? It doesn’t make sense. Right?
Home loan packages with a lock-in clause tend to offer cheaper rates, which means lower monthly repayments and overall less interest paid during the loan tenure.
If you do not intend to refinance during this period of lock-in anyway, there is no reason why you shouldn’t take advantage of cheaper loan packages by taking up a lock-in clause.
For example, you took up a home loan suggesting a 3-year lock-in period and you are not looking to refinance it until the fourth year (which is when the interest rate generally becomes substantially higher).
In such a case, it is meaningless to not accept the lock-in clause in the home loan package if it comes with an advantage of a lower interest rate.
Also, if interest rates are lower (like right now!) than in previous periods, it is good to take up a home loan with a lock-in clause.
There are potential downsides of home loans with a lock-in clause as discussed below:
Most borrowers worry about being stuck with a higher rate loan in a rising interest rate environment. This can be true for a floating rate loan package, which consists of a fixed percentage (spread) plus a benchmark rate that can fluctuate over time.
Case in point would be during the Covid pandemic where home loan interest rates had been at a record low, so rising interest rates would have not been as much of an issue for home loan borrowers during that period.
This makes lock-ins immaterial as you can’t go to find a cheaper interest rate to refinance anyway. In fact, floating rates were the preferred choice for home loans because of how they were.
However, as the world started to recover from the Covid-19 crisis, interest rates have been going up and are now at a historical high.
A DollarBack Mortgage broker can help you find the best home loan that best fits your financial situation and further advice you if you should take a home loan with a lock-in clause or not.
Although it happens rarely there is a possibility that due to some emergency or crucial circumstance, things at your end change and you might need to sell your house before the lock-in period expires.
In such a case, the bank will charge a penalty of 1.5% of the remaining or redeemed loan amount, which can hurt your future financial planning.
Since the chances of this scenario occurring are low, you may pick a cheap lock-in loan package rather than choosing a more expensive one with no lock-in.
If you have to sell your home during the lock-in period, it is best to consult with a mortgage broker to know the potential loss that you will incur considering the penalty plus the legal and valuation charges.
A lot of first-time homebuyers easily push back on lock-in periods because they think they offer no real benefit.
While there are circumstances when the lock-in clause could come across as limited and disruptive, it is safe to say that home loans with lock-in clauses are not bad all the time.
Depending on your financial situation and the bank you are working with, lock-in clauses might just work in your favour.
Some banks offer benefits for taking up a home loan with a lock-in clause.
Firstly, in exchange for a lock-in, banks compensate by offering borrowers a slightly cheaper interest rate. They can do so by adjusting the bank spread to offer a loan rate lower by 0.2 to 0.3 per cent or so.
This might not look like making a big difference – but given the large size of home loans and the effect of compounding can make small changes accumulate to significant sums by the end of the loan tenure.
Let’s understand this with an example by comparing a home loan with lock-in and without lock-in.
Suppose you took a home loan of $5,000,000 for a duration of 30 years (360 months).
Home Loan with No Lock-in (interest rate: 2.0 % p.a.):
|Total Amount Paid
|Total Interest Paid
Home Loan with Lock-in (interest rate: 1.8 % p.a.):
|Total Amount Paid
|Total Interest Paid
As you can see, a slight difference of 0.20% in interest rates can result in saving more than $496 per month. If you continue to pay the home loan at the same rate for the whole loan tenure, the difference in total interest paid will be around $178,577.59.
Please note that we know that interest rates fluctuate through the entire loan tenure. The above example is hypothetical and just used to illustrate that even slight differences in the interest rates can impact your bottom line.
Hence, it is sometimes justified to take up a home loan with a lock-in clause, especially if the interest rate offered is low.
Secondly, there are more than a few bank home loans with a lock-in period that provide a waiver of penalty in the event of sale of a property.
The “waiver of penalty in the event of a sale ” suggests that if you want to pay off the loan early due to selling your house, you won’t be penalised by the bank.
This incentive works well for borrowers who may have a plan to sell the house in the near term. For instance, you would want to get a loan package that offers this waiver for a 5-year lock-in clause if you have plans to sell and upgrade within the 5 years lock in period.
Some banks offer conditions that mitigate the risks of a lock-in clause and make a loan package worth taking. The two most common ones are:
While most banks penalise you of 1.5% of the redeemed loan amount if you want to pay off your home loan early (i.e. during the lock-in period), some banks won’t do so.
Yes, some banks do not have a early repayment penalty during the lock-in period. This can be highly beneficial for borrowers to mitigate the effect of rising interest rates.
By making prepayments, you can successfully lower the total interest paid during the loan tenure. It is comparable to refinancing to a cheaper loan package – without the additional refinancing costs.
However, usually, there is a limit to how much you can prepay without incurring a penalty.
Most banks only allow partial prepayment, which means you can repay a certain amount, say $150,000, without getting penalised. If you pay anything more than that, you are liable to pay additional costs to the lender bank.
This option favours borrowers who feel they might pay down their home loan to lower their monthly repayments once a certain amount of money comes in.
If you are lucky, your bank might also offer a full waiver for the sale of a property. That means you will incur no prepayment penalties even on paying off the entire loan amount if you are selling the home. If you intend to sell your home during the lock-in period, you would want to choose a bank like this.
Repricing is a condition when you switch from one loan package to another within the same bank, unlike refinancing, where you switch to a loan package from a different bank altogether.
Further reading: Refinancing vs Repricing
Some banks offer a free repricing option within the lock-in period. For example, you will definitely want to switch to a lower rate package (without incurring any costs) if your bank has launched a new loan package, considering the low-interest-rate environment.
However, please note that while the bank is offering a free repricing within the lock-in period, it may or may not save you money. The bank ultimately decides which home loan interest rate package to offer you and you don’t know how competitive that interest rate option might be.
Before you make a decision, sit back and think it through: what is the probability of you needing to refinance during your lock-in period? Are you willing to go through the annoying process and pay additional costs of refinancing during the lock-in period?
Typically, the lock-in period for a home loan in Singapore can range from 1 to 5 years based on whether it is a fixed or floating rate package. This period may also vary depending on the lender and borrower’s underwriting.
In most cases, the interest rates climb up after the lock-in period as fixed rate packages revert to floating rate packages. If this happens, you should be prepared to refinance your loan.
You can back out of a mortgage lock-in period, but there are consequences. You will have to start over your mortgage application whether with the same bank or a new one and you will have to pay cancellation fees which is usually 1.50% of your entire loan amount to your existing bank.
Technically, you can refinance at any time – even during the lock-in period. However, it is recommended to wait until this period is over before initiating the refinancing process. If you do so during the lock-in period, you will be charged a full redemption penalty by your bank.
As lock in periods are dependent on the amount of stability a specific interest rate package is provided, we do generally see that fixed rates have the longest lock in period.
Currently, the following lock-in periods are offered by all major banks in Singapore:
|DBS, UOB, OCBC, Maybank, SCB, CIMB, Citibank, HSBC,BOC, SBI, Hong Leong
|DBS, UOB, OCBC, Maybank, SCB, CIMB, Citibank, HSBC,BOC
Therefore, the bank with the longest lock in period for their home loans currently would be DBS and the shortest lock-in period would be OCBC.
*Do note the above table is not exhaustive
The most important thing about whether to take up home loans with lock-in clauses is that you or your mortgage broker should be clear about your property investment plan for the future.
This will help in better understanding how the lock-in clause will affect you in the long run. Even if you are not interested in the advantages or flexibility that come with accepting a lock-in clause, there is still no point in avoiding it at the cost of cheaper rates.
Keep in mind that penalties are only applied, if ever, when you trigger them!
If you are ever in doubt, do speak to one of our mortgage specialists who can help you decide whether or not should you go with a home loan with a lock-in clause.
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