When you are taking up home loan to finance your house purchase, I urge that you take the time to read every words in the offer letter before you sign it. If you find that there is too much details for you to look at them in depth, ask these important questions for thorough explanation before you sign the mortgage offer letter.
One thing to be aware of is the lock-in period. Lock-in period is the time frame when you do a full settlement of your loan in the first few initial years of your loan tenure, the lender (or the bank) can impose a penalty. This is a sample of the full redemption clause taken from my own home loan offer letter.
Image: Full redemption term in a home loan offer letter.
Notice that if I settle the loan within five years from the first draw down date, I will have to pay 3% from the original loan amount or RM5000 whichever is higher.
For example, if my original loan amount is RM200,000, when I choose to settle the loan or refinance it to other banking institution, the amount I need to pay for penalty is:
RM200,000 x 3% = RM6,000
Before you sign the offer letter, there are two particular issues that you need to understand:
1. Draw down date or disbursement date
Draw down date is the date when the bank release payment. It is also known as disbursement date. For completed building, this won’t be an issue. But if you are financing home which is still under construction, please be aware. For example, your home is still incomplete, CF (Certificate of Fitness) is not yet obtained. You bought it in year Jan 2005. The bank will release a portion of your loan to the developer by stages. Let’s assume that it takes 2 years for your home to be completed.
Image: Home loan draw down date illustration
If the banker calculates the lock-in period from the 1st draw down date, you won’t be penalized if you refinance your home loan on April 2010. If the period commences from the full draw down date, you would have to wait until 2012 Jan to fully settle your loan penalty-free. That means you are actually locked-in more than 5 years total.
Conclusion: Demand the lock in period commencement on the first draw down date.
2. Penalty on outstanding loan or original loan amount
Some bankers calculate the penalty on the outstanding loan plus all the capital repayment. Some bankers charge penalty on the original loan amount. Let’ say you intend to settle your loan earlier after 3 years, the former will impose less penalty compared to the later.
Example:
Original loan amount – RM200,000
Outstanding loan amount at the time of settlement – RM180,000
Calculate from original loan amount: penalty = RM200,000 x 3% = RM6,000
Calculate from outstanding loan amount: penalty = RM180,000 x 3% = RM5,400
Conclusion: Demand penalty to be calculated based on outstanding loan amount plus capital repayment instead of the original loan amount.
I wish that you will be able to negotiate a better deal for your home loan through this article.
{ 15 comments… read them below or add one }
Thanks for the info. Very informative.
yes, thank you very much. those bank execs won’t tell these things.
@Zaid,
Welcome to this website. Try the new forum for more information : forum.kclau.com
Hi KC,
Good website and information on money. I planned to refinance my house which is still pending for OC. Current rate is very high BLR+0.5%.
Details:
Loan amount: RM 157000
Period: 30 year
1st year: RM623/month
2nd year: RM912/month
3rd – 30 years: BLR + 0.5%
1st loan payment: May’2007
Lock in period : 5 years @ 3%
Need your advise is it worth to refinance my loan with new bank that offer BLR- 1.5% (with 95% refinancing) and how much penalty that I need to pay and how much I need to top up.
Your advice is very much appreciated..
Regards
Nasrul
Hi KC,
Such a great website! Keep it up!
Hi,
I understand that the penalty for the early settlement for the Islamic home loan package is based on Cost of Fund (COF). How this works? Is it based on the highest difference of the COF & our rate? Is the difference is calculated in yearly basis or just once? Thanks.
Hi KC,
I finished reading your book.Found it very useful.BTW,I try to nego for theLock-in period
with most of the ban ks and they dont seems to agree.How cam i go about?|
TQ
@Visva,
Just try several banks and get the one you are comfortable with. There are package with 3 years lock-in period nowadays.
Hi KC
Great info for finance dummy like me. Need advice on how to consolidate all my debts: cc + homeloan. Hv been trying to settle all cc’s and had requested the bank to reduce monthly instalment instead of reducing the loan tenure. FYI, I bought a house few yrs back with a loan approved for 14 yrs repayment. The monthly repayment is too steep for me and after reducing the loan to almost half fr EPF withdrawal (after 3 yrs ), the bank reduced the number of years instead of the monthly installment amount as I hoped. Reason being of affordability & age factor. Question is, how come when the loan was approved, it was for 14 yrs repayment, but after rescheduling, the repayment period is not maintained (balance of years approved previously) but the repayment amount is maintained? I was trying to settle car loan + cc’s by trying to reduce the monthly home loan. I wd really appreciate any advice. Thank you.
HI Hani,
You can ask the bank to restructure your loan.
If they don’t want to do that, you can always refinance to other bank.
KC,I need your opinion and insight. I applied for home loan- and now left with the choice between CIMB and Public Bank. The details are as follow:
House price=rm190k(apartment-completed-individual)
Loan amount is rm171k.
CIMB
-CONVENTIONAL
-90% LOAN
-35 YEARS REPAYMENT PERIOD
-monthly =~rm790(INCLUDE MRTA BUT I FORGOT TO ASK INSURANCE COVER HOW MANY YRS)
-BLR – 1.7
-5 YRS LOCK-IN PERIOD
-AP REDUCE ON PRINCIPLE
PUBLIC BANK
-90% LOAN
-37 YEARS REPAYMENT PERIOD
MONTHLY=RM768(+ INSURANCE THAT COVER FOR 30 YRS OF REPAYMENT PERIOD)
- BLR – 1.8
- AP REDUCE ON PRINCIPLE.
Please help – my main concern now is their T&C and how good their services will be..
Thank you very much..
KC Lau,
What is your opinion if you need to finance two apartments, is it good to go for one bank to finance the two apartments or two different banks to finance two different apartments.
AG
I finance my properties from different banks, due to the offer at the time of financing.
I think it depends on your need and also the package offered by banks, and also the timing.
KC,
My wife is a bumi and I am a Chinese, if my wife purchase a bumi lot property (5% discount for the bumi lot) under her name, can she transfer the bumi lot to me as love of affection? Is the property still under the bumi lot after the transfer to a non bumi person?
AG
Hi Alfie,
I just called up a lawyer in Penang. He said that it can be done.
It can be done in Penang. But we are not sure if it is the same situation in other states.