The term ‘lock-in period’ often has a negative connotation when the time comes to refinance home loans. The lock-in period is often seen as a clause to limit options, prevent prepayments and impose additional charges and penalties on homeowners.
Although this is a common perception in Singapore, the reality is that when you refinance home loans, the restrictions they impose aren’t always a bad thing.
With rising interest rates expected in the year ahead, Singaporean homeowners will see higher interest rates for home loans. Most recently, the US Fed has announced that we are likely to see six more hikes this year, after the first adjustment in March 2022.
What can you do to manage your home loan? Refinance your home loan, of course.
If you’re in the process of applying for a home loan and you don’t know whether you would accept a lock-in period for a special promotional interest rate or not, this article might be able to help you decide.
We’ll explain what lock-in periods are, and we’ll also discuss the stereotypes about lock-in periods and prove how some could even be useful for you.
Interest rates are set to rise in 2022, so act now! Refinance your home loan to secure record low mortgage rates while you still can.
Check out SmartRefi to track your mortgage against daily rates and be notified of the best times to refinance, or speak to PropertyGuru Finance mortgage experts for unbiased advice and recommendations.
Home Loan Refinancing: What is a Lock-in Period?
A lock-in period is very common in the mortgage realm. As its name suggests, the lock-in period is the period of time during which you are contractually obliged to remain with a lender, as a condition for receiving a particular rate, discount, or promotional perks.
The duration of the lock-in period is usually two to five years. During this time, you cannot redeem or refinance your loan – if you do, you will need to pay a penalty fee.
Related article: Housing Loans Guide: “Chim” Mortgage Jargon, Compiled and Explained for Beginners
3 Stereotypes about Lock-in Periods When Home Loan Refinancing and Why They Aren’t Always Bad
Here are some of the most common stereotypes or misconceptions people have of refinancing their home loans with lock-in periods as well as some reasons why they aren’t that bad at all for you.
Refinance Home Loan Stereotype #1: Lock-Ins Won’t Let You Refinance or Sell Your Property
This is not true.
In fact, there are some bank packages that waive penalty costs if you sell your property! You can see which bank loans offer this perk on PropertyGuru Finance, where it will be indicated as ‘waiver due to sales’.
You can still sell or refinance your home loan if your package does not include waivers. The only catch is that you must pay the penalty fees.
But this isn’t always a bad thing. More realistically, whether or not lock-in periods prohibit you is less relevant than 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’re buying an HDB flat, the Minimum Occupation Period (MOP) of five years you have to observe is longer than most lock-in periods (two to five years), so the lock-in period is not relevant.
It’s also quite rare to need to refinance home loans or sell your home in such a short amount of time that the lock-in comes into play, unless it’s a rare emergency or crucial circumstance. Besides, this might not matter to you at all if you’re someone who wants to stick with one loan or one house for life to save yourself from hassle.
Refinance Home Loan Stereotype #2: The Lock-In Period Isn’t Worth It Because Penalties Are High
Not really. Banks charge a typical penalty of 1.5% of the remaining or redeemed loan amount for refinancing, selling a property, or paying off your mortgage earlier than agreed. While this may sound too much, because, for example, 1.5% of the $500,000 loan amount is $7,500, you’ll realise that it is actually very possible to refinance, pay the penalties and still save significantly on long-term interest costs.
Of course, if the difference in the interest rates is marginal, then it may not make sense to pay the penalties. However, it’s totally possible for the difference to be big enough to be worth it – especially now that mortgage rates are at historical lows.
Let’s take for example the $500,000 remaining mortgage for the private property that you need to pay for 25 years more. Using our mortgage affordability calculator, we’ve calculated how much you could save.
So, if your current discounted interest rate is 2% (where you need to pay $2,119 per month) and you would like to refinance for a 1.6% interest rate with another bank (so you can just pay for $2,023 per month) to save $28,800 from your total cost, you can still save up to a total of $19,300 even after deducting the 1.5% penalty of $7,500 plus the legal and valuation charges that may cost around more or less $2,000.
Related articles:
- Refinancing your Bank Mortgage: How Much Can You Save?
- Refinancing HDB Loan Singapore: 5 Steps On How You Can Calculate On Your Own
Refinance Home Loan Stereotype #3: There’s No Real Benefit in Lock-In Periods
Some people easily push back on lock-in periods because they think that at the end of the day, they offer no real advantage. While lock-ins are often considered as one-sided prudence measures for banks to protect themselves in exchange for cheaper deals that may lead to losses for them if you end the loan or refinance earlier, it’s not true that they offer no real benefit on your end.
In fact, some of the cheapest home loans usually come with lock-in periods. Many fixed-rate packages, which offer borrowers peace of mind of a stable interest rate and predictable monthly repayments, also come with lock-in periods.
As mentioned above, lock-in periods aren’t that long. And if you aren’t planning on paying off your loan, refinancing, or selling your home in the next few years, then the amount you can save on interest fees could be totally worth it.
Some other benefits you can enjoy include lower fees on subsidies, and not paying for the usual charges related to refinancing or selling a home.
Home Loan Refinancing: Find The Right Home Loan With A Suitable Lock-in Period
As you can see, home loans with lock-in periods could also be useful, but there are some circumstances where they could still be limiting and disruptive. But either way, it’s safe to say they’re not bad all the time.
If you’re still unsure on what type of mortgage would be best for your financial situation, seek advice from PropertyGuru Finance’s home loan advisors as they can recommend the best options for you and also advise whether or not you should get a loan with a lock-in period.
Thinking of getting a bank home loan? Compare the best mortgage rates on PropertyGuru Finance, or contact us for more personalised advice and recommendations:
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More FAQs about Lock-in Periods and Home Loan Refinancing
What Is 3-Year Lock-in Period?
A 3-year lock-in period means for three years, you cannot redeem your home loan. This includes paying off the entire loan, refinancing, or selling your property (unless there is a waiver due to sales).
What Is the Minimum Lock-in Period for Home Loan?
There is no minimum lock-in period, and some home loans do not have a lock-in period at all. If there is, the shortest lock-in period for home loans in Singapore is usually one year.
How Long Can You Lock in a Mortgage?
The maximum home loan tenure in Singapore is 30 years (HDB flats) or 35 years (non-HDB property). Usually, bank loan promotions and packages last for one to five years.
Can You Refinance Your Home Loan with the Same Bank?
No. This will be called repricing. Home loan refinancing is when you switch to another bank.
When Is A Good Time for an HDB Loan Refinance?
HDB loan refinance can happen any time, but most HDB homeowners refinance after 4 to 5 years. This is after they have paid off at least 25% of the property’s value/price so that they would not need to pay any more cash.
How Long Does It Take for an HDB Loan Refinance to Go Through?
How long HDB refinancing takes may depend on the volume of applications received by the bank, as well as their individual processing times. However, it generally takes 4 to 6 weeks to complete.
