When it comes to home loan refinancing, the term “lock-in period” often carries a negative connotation. A lock-in period is typically seen as a clause that restricts choices, prevents prepayments, and imposes additional fees and penalties on homeowners.
While this is a common perception among Singaporeans, the reality is that the restrictions imposed by banks when you refinance your housing loan are not always a bad thing.
If you are in the process of applying for a home loan and are unsure whether you should accept a lock-in period for a special promotional interest rate, this article may help you decide.
We will explain what a lock-in period is, discuss the stereotypes surrounding it, and show that some lock-in periods might even be beneficial for you.
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Home Loan Refinancing: What is a Lock-in Period?
Lock-in periods are very common in the mortgage industry. As the name suggests, a lock-in period is a duration during which you are contractually obligated to stay with the lender (usually a bank) as a condition for receiving a specific interest rate, discount, or promotional offer.
The duration of a lock-in period is typically two to five years. During this time, you cannot redeem or refinance your loan–if you do, you will need to pay a penalty.
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Stereotypes About Lock-in Periods and Why They Aren’t Always Bad
Here are some of the most common stereotypes or misconceptions about home loan refinancing with lock-in periods, and some reasons why they might not be so bad for you after all.
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You are not allowed to refinance your mortgage or sell your property during the lock-in period
This is not entirely true. In fact, there are some bank packages that waive the penalty fee if you sell your property! You can see on Anjia SG or consult our mortgage experts about which bank loans offer this benefit, which will be indicated in the Letter of Offer as a “waiver due to sales.”
If your package does not include a waiver, you can still sell or refinance your home loan. The only catch is that you will have to pay the penalty fee.
But this isn’t always a bad thing. More realistically, it’s less about whether the lock-in period prohibits you and more about whether you can or need to sell or refinance your home loan within the lock-in period in the first place.
For example, if you purchase an HDB flat, you must adhere to a Minimum Occupation Period (MOP) of 5 years, which is longer than most lock-in periods (2 to 5 years), so the lock-in period is irrelevant.
The need to refinance a home loan or sell a property in such a short period is also quite rare, unless in a rare emergency or critical situation where the lock-in period comes into play. Moreover, if you are someone who wants to stick with the same loan for life or stay in the same house long-term to avoid hassle, this may not matter to you at all.
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A lock-in period isn’t worth it because the prepayment penalty is high
Not necessarily. The penalty charged by banks for refinancing, selling a property, or paying off a mortgage earlier than agreed is typically 1.5% of the outstanding or redeemed loan amount. While this may sound like a lot—for example, 1.5% of a S$500,000 loan is S$7,500—you’ll find it’s actually quite possible to refinance, pay the penalty, and still save significantly on long-term interest costs.
Of course, if the difference in interest rates is small, then paying the penalty might not make sense. However, it’s entirely possible for the difference to be substantial enough, especially when market rates are low.
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A lock-in period has no real benefits
Some people are quick to dismiss lock-in periods because they believe they offer no real benefits in the end. While a lock-in period is often seen as a one-sided precautionary measure by banks to protect themselves in case you terminate the loan early or refinance, causing them a loss, it’s not to say they don’t have any advantages for you.
In fact, some of the cheapest home loans often come with a lock-in period. Many fixed-rate loan packages, which offer borrowers stable interest rates and predictable monthly payments, also have lock-in periods.
As mentioned above, lock-in periods are not that long. If you don’t plan to pay off your loan, refinance, or sell your home in the next few years, the interest savings you can get might be worth it.
Some other benefits you can enjoy include reduced subsidized fees and not having to pay the general fees associated with refinancing or selling a home.
Finding the Right Home Loan with a Lock-in Period at Anjia SG
As you can see, home loans with a lock-in period can be useful, but in some situations, they can still be restrictive and detrimental. Regardless, it’s safe to say they are not always a bad thing.
If you’re still unsure which type of mortgage is best for your financial situation, seek advice from the mortgage experts at Anjia SG. We can recommend the best options for you and advise on whether you should get a loan with a lock-in period.
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