You will be able to find the costs and limits hidden in a loan package beyond its headline rate.
The broker's two fixed packages from lesson 5.2 looked close: 2.50% fixed for two years against 2.35% fixed for three. The first also came with a S$2,000 subsidy for legal fees, which Hakim counted as a win. Then Farah asked what would happen if Hakim's company sent him overseas in eighteen months and they had to sell. The broker went quiet for a moment and said it depended on the lock-in.
A package is more than its rate. It comes with conditions that cost money if your plans change, and with rates and fees that apply after the headline period ends. This lesson puts a dollar figure on those conditions, so you can compare packages on what they would really cost you.
The lock-in period is the stretch of time, usually the first two or three years, during which repaying the loan in full, or refinancing it to another bank, triggers a penalty. The penalty is usually a percentage of the amount you repay, stated in the letter of offer.
Here is what that could mean for Farah and Hakim, using an example penalty of 1.5%. If they sold the flat in month 18 and repaid the loan, the balance on the first package would be about S$408,200, and the penalty about S$6,120. The second package, still in its three-year lock-in, would cost about the same. A floating package with no lock-in would cost nothing to leave.
Selling isn't the only trigger. Refinancing to another bank during the lock-in costs the same penalty. And a large partial repayment, such as putting a bonus or an inheritance into the loan, may be penalised too, depending on the terms. Read the fine print: payslips, statements, policies and contracts, lesson 8.2, Lock-in periods and prepayment penalties, shows how to find and read each of those clauses.
Banks often offer to pay some of your costs: a subsidy towards legal fees, a free valuation, sometimes a cash rebate. These usually come with a clawback, a condition that you repay the subsidy if you redeem or refinance the loan within a set period. That period is often longer than the lock-in.
That matters for the first package. Its lock-in ends after two years, but the S$2,000 legal subsidy is clawed back if they leave within three. So if Farah and Hakim refinanced in month 30, they would pay no penalty but still owe S$2,000. The subsidy is only worth S$2,000 to them if they stay at least three years. If they plan to switch as soon as the lock-in ends, it is worth nothing.
Partial prepayment rules vary. Some packages allow a free partial repayment once a year after the lock-in, others require notice and a minimum amount. If you expect a lump sum, such as a bonus, a sale of shares or help from family, check how and when you could put it in.
Conversion or repricing fees apply if you switch to another package with the same bank, sometimes only during the lock-in. Lesson 8.1, Reprice or refinance when the lock-in ends, comes back to them.
The rate after the lock-in is the most expensive term of all, because it runs for years if you don't act. A package fixed at 2.35% for three years and SORA plus 1.20% after it costs much more over the life of the loan than one at SORA plus 0.30% throughout, unless you reprice or refinance on time.
There can also be a cancellation fee if you accept an offer and then don't draw the loan, and conditions such as a linked account or fire insurance requirements. Read the fine print, lesson 8.3, Clawbacks, cancellation fees and other conditions, covers how those are written.
To compare packages fairly, pick a horizon, the length of time you realistically expect to keep the loan before switching or selling. For most buyers who plan to act at the end of the lock-in, that is three years. Then add up everything you would pay over it.
For Farah and Hakim's S$427,000 loan over 25 years, the first package's interest over three years, at 2.50% for two years and an example 3.40% in year three, comes to about S$34,230. Take off the S$2,000 subsidy, since they would keep the loan past the clawback, and it is about S$32,230. The second package, 2.35% for three years, costs about S$28,782 in interest, with no subsidy. Despite the subsidy, the second package costs about S$3,450 less over their horizon.
Now change the horizon to two years. Leaving the first package at the end of its lock-in would bring back the S$2,000 clawback, and leaving the second would mean a penalty, because its lock-in hadn't ended. The answer depends on what you expect to do, which is why you write down your horizon before you compare.
For one package you are considering, collect the terms that cost money: the lock-in and penalty, the clawback period and what it covers, the rules for partial repayment, and the rate after the lock-in. The activity below asks for exactly those four, which you'll need again for the comparison in lesson 5.5.
For one package, list the lock-in, clawback period, prepayment terms and the rate after the lock-in.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).