For example: If one have a RM300,000 housing loan with a lock-in period of 5 years and an exit penalty of 3% by choosing to pay off the loan in full any time during the 5-year period, the person will pay this amount to the bank as penalty:
Penalty for early settlement = 3% × RM300,000 = RM9,000
Most property loan borrowers do not pay attention to lock-in period when considering home loan packages mainly for the for key reasons:
- They may not understand what it is and how it is going to affect them in future terms; and
- They do not think they will have the money to pay off the loan amount in full any time soon, hence thinking it is irrelevant.
However, even if one is 100% convinced he/she will not have the cash to pay off the loan in the near future, there are still many circumstances where it could affect the person in future. For instance, one may suddenly decide to sell off the property, or may opt to refinance either to take advantage of a better interest rate by another bank or to unlock the home equity. If these take place during the lock-in period, the person will incur the exit penalty by paying off the property loan during the defined period.
When choosing a property loan, it is for one's best interest to keep the lock-in period as short as possible and the exit penalty as low as possible. If possible, one should attempt 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 affect the home loan interest rate. If a bank offers 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 as a good deal because in any loan, the interest rate should always be the priority.
In Malaysia, there are actually a handful of banks that offer housing loans without such periods. It is always advisable to consider all the potential future changes and charges before committing to any home loan.
