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.

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.


Personal finance author and trainer

    30 replies to "Beware of the Lock-in Period of your Home Loan Offer Letter"

    • Angeline

      Hi KC,

      I need your advice, currently I have housing loan with RHB flexi home loan, lock in period 3 years, fund has disbursed to developer 35% out of the total loan, first disbursement in May 2018. I would like to cancel s&p due to some issue with the developer.

      How to minimize my penalty? or it is possible to discuss with the rhb banker to continue this housing loan if i buy another new property?

      Thanks and regards
      Angeline Wong

      • KCLau

        I am not so sure about the consequences in your situation. Since the developer had received 35% of the loan amount, I don’t think they will refund you / bank when you choose not to proceed. The building is already in progress.
        If you don’t want the bank to continue funding the project, you would need to speak to the banker and loan lawyer. See what is the alternative.

    • Jey Val


      Can I knw what does this mean:
      …..3% on 90% of the total approved facilities limit for the first 36 months from 1st release, and 80% of the total approved Facilities limit for month 37 to 60 month…

      loan amount approved was rm440K


      • KCLau

        I think that is the different tier of penalty if you settle the loan early.
        <36 months - 3% on 90% loan
        37-60 - 3% on 80% loan

    • gk

      Hi , i would as if we default in housing loan repayment about 2 months , then if the bank send new restructed repayment with a higher amount,how can we maintain the initial plan repayment rate with bank . please advice

    • lawson

      KC,it will be good for readers if you publish on the best available full flexi housing loan among the local bank. When I applied Public Bank full flexi housing loan the way it was explain to me is that the sum in the current account could be only use to off set 30% of housing loan. Meaning that I understand it as 500k loan released – 150k in saving account = interest chargeable is on 350k. Too bad I did not request for a spread sheet from the loan officer. Later when I had more than 20k in current account vs 80k loan released there is not deduction interest. I enquire why the reason given is that the amount in current account saving must more than 30% than release sum. meaning 34k – 24k will enable 10k to off set the released portion of the loan.

    • Roshan


      I have taken a home loan and LAP from Capital First last month and due to some circumstances I need to close the loan as I’m selling the property. Please guide me and suggest how do I proceed and is there option of closing the loan before the lock in period of 1 year. I am yet to pay the first EMI as the loan was disbursed last month.

      Please help with the process and how much will be the penalty if there is an option to close the loan.


    • Leon

      Hi KC,

      I am about to purchase my 1st property, is a sub-sales property. the selling price is 250,000 but bank value only 200,000. question is does we need to topup the 50,000 before S&P or after ?

      • KCLau

        You will need to top up before the bank release the payment. That’s after S&P.

    • Daphne yong



      If we would want to part settle our housing loan with RM150k which currently it stands as RM285500, lock
      in period is 2/3 years, which is over , how many years for us to settle the balance loan. Is it that 285500 less 150k=135k/1818=75 months/12= 6++ years to settle?

      Thank you

      • KCLau

        Hi Daphne,

        It is not calculated as simple as this, because you still need to pay interest for the remaining outstanding. I believe you can ask your banker to generate a new schedule for you. Anyway, using financial calculator, we can calculate that it will take 137 installments to pay off the remaining outstanding loan. That’s about 11 year 5 months.

    • […] Beware of the Lock-in Period of your Home Loan Offer Letter […]

    • Lilian

      Hi KC,

      I was just made to understand that Bank Negara came out with this rulling on early loan settlement, i.e. for early settlement cases which is still within lock in period starting 1 July 2012, there will not be any penalty imposed. The bank should only charge for cost incurred in processing the loan & not for profit loss, which I believe not more than RM500. Is this true?

    • Suthageran

      Hi, Kc

      Just recently we( myself& my wife) asked house agent to sell our house. later the agent got us a buyer, we sign an letter saying that we will sell the house to the buyer.They must sign S&P within 14 days working days. But they fail to sign, so we got the right to forfeit the deposit that they pay to us. But now the buyer blameing us that we delay the S&P. Pls advise

      • KCLau

        I suggest that you discuss with the buyer to sort things out. If they are genuine buyers, why not make the deal easier?

    • alfie goh

      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?


      • KCLau

        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.

    • alfie goh

      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.


      • KCLau

        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.

    • Jude

      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.

      -90% LOAN
      -BLR – 1.7

      -90% LOAN
      – BLR – 1.8

      Please help – my main concern now is their T&C and how good their services will be..
      Thank you very much..

    • Hani

      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.

      • KCLau

        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.

    • Visva

      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?|

      • KCLau


        Just try several banks and get the one you are comfortable with. There are package with 3 years lock-in period nowadays.

    • Chuan


      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.

    • Shasi Kala

      Hi KC,

      Such a great website! Keep it up!

    • Nasrul Jan

      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%.


      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..


    • zaid

      yes, thank you very much. those bank execs won’t tell these things.

      • KCLau


        Welcome to this website. Try the new forum for more information : forum.kclau.com

    • Jalte

      Thanks for the info. Very informative.

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