In our previous article on the six things you should consider when taking up a home loan in Malaysia, we singled out lock-in period as one of the main considerations for home loans. If you’re actively searching for a home loan right now, allow us to offer a more in-dept explanation on why you should avoid a lengthy lock-in period, as well as answer a question many are asking: it is possible to secure a home loan with NO lock-in period in Malaysia?
First Off, What is Lock-In Period?
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. In Malaysia, a lock-in period could be anything from three years up to five years or more, whilst 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 of the legal agreement is signed.
Example:
Say you have a RM500,000 home loan with a lock-in period of 5 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 Lock-In Period Affect You?
Most home loan borrowers do not pay attention to lock-in period for two key reasons. Firstly, they may not understand what a lock-in period 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 the lock-in period 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 a lock-in period could affect you. As an 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 home loan during the said period.
What is a Good Strategy When It Comes to Lock-In Period?
When choosing a home loan, it is to 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 lock-in period at all.
NOTE: Though lock-in period is important, do not let it jeopardize 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 do offer home loans with zero lock-in periods. They can be found on this home loan comparison table.
Looking for a home loan with no lock-in period? Compare all the bank terms.
Ultimately, the bottom line is that lock-in period matters if you’re looking for a home loan. For all home 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 when it comes to your home loan!
