You will be able to find the lock-in and prepayment terms and work out what early repayment would cost.
Mei's parents had offered Jason and Mei a gift towards the flat, to be paid once they sold their own place, probably within a year or so. Jason and Mei planned to use it to pay down a chunk of the mortgage. It seemed like an obviously good idea, until Mei found a clause in Offer A headed "Prepayment and redemption" that mentioned a penalty. Paying off debt early, it turned out, could cost money.
Many home loan offers in Singapore have a lock-in period, and the clause that sets it out decides what changing your plans would cost in the first few years. This lesson shows you how to find the lock-in and prepayment terms and work out the cost of repaying early.
A lock-in period is a stretch at the start of the loan, often the first two or three years, during which repaying the loan early, in full or in part, triggers a penalty. Refinancing to another bank during the lock-in counts as repaying the loan, so it triggers the penalty too.
Banks use lock-ins because they price a package expecting to earn interest on it for a while. A low rate in the first years is often paired with a lock-in for exactly that reason.
The offer letter states the lock-in period, usually near the rate table or in the section on prepayment, redemption or cancellation. Offer A, in Jason and Mei's example, had a two-year lock-in. Offer B had a three-year lock-in. That difference matters at least as much as the difference in rate, and the broker hadn't mentioned it.
The prepayment penalty is usually a percentage of the amount you repay during the lock-in. That's the key point, because it means the penalty scales with the amount: a small partial repayment brings a small penalty, while repaying the whole loan, or selling, brings a penalty on the whole outstanding balance.
The offer letter states the percentage. Here's how it works with Offer A, using example figures: a S$600,000 loan over 25 years at 2.6% for the first two years, and a penalty of 1.5% of the amount repaid within the lock-in.
Halfway through the two-year lock-in, at the end of month 12, the outstanding balance would be about S$582,731. Repaying all of it then would bring a penalty of 1.5% of that, about S$8,741. If they repaid S$50,000 of it instead, the penalty would be 1.5% of S$50,000, which is S$750.
To work out the balance at any month, use your loan's own amortisation schedule, which the bank can provide, or a spreadsheet. You'll build one with the PMT function in lesson 8.4, Compare two loan offer letters. The penalty percentage is always in the offer letter.
Some offers allow partial repayments without a penalty, even during the lock-in, within limits. Others allow them only after the lock-in. Either way, there are usually conditions: a minimum amount per repayment, a period of written notice before you pay, and sometimes a cap on how much you can repay in a year without penalty.
Read these conditions as carefully as the penalty itself, because they decide whether a plan like Jason and Mei's works. Their gift would arrive in about a year, in the middle of Offer A's lock-in and early in Offer B's. Under Offer A, a S$50,000 repayment at month 12 would cost S$750 in this example. If they could wait until month 25, after the lock-in ended, it would cost nothing, but only if the letter allowed penalty-free partial repayment then, with whatever notice it required.
They also checked what a partial repayment would do. Most offers let you choose between lowering your monthly instalment and shortening the loan. The letter usually says which applies by default.
Selling is the case that catches people out. If you sell the property during the lock-in, the loan has to be repaid from the sale, and that repayment usually triggers the penalty in full. Some offers have exceptions, and if yours does, the letter will spell them out.
So match the lock-in to your real plans. If there's any chance you'll sell, move or refinance in the next few years, a longer lock-in is a real cost even if its rate is lower. A two-year lock-in and a three-year one can look similar on paper, but if you sell in month 30, one has ended and the other hasn't.
For each offer, write down the lock-in period, the penalty percentage, whether partial repayments are allowed during and after the lock-in, the minimum amount and notice, and what happens if you sell. Then pick a point in time that matches a plan you might really have, and work out the penalty.
Jason and Mei's notes made one thing clear. Offer B's lower starting rate came with a longer lock-in, and their own plans included a lump sum and, possibly, a move within a few years. Neither fact decided it alone, but both went into the comparison.
For the activity, a convenient point to test is the middle of the lock-in, where most loans would still charge the full penalty. You'll need the outstanding balance at that month.
Work out the penalty on one loan offer if you repaid the whole loan halfway through the lock-in period.
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