Thinking of selling your property in less than 5 years? Be aware of how your returns may be affected by your property loan agreement lock-in period


You have taken up your home loan at an attractive rate on your perfect property choice. However, what if, a few years later you need to sell off your property as you need the cash OR you want to realize the gains of your property price appreciation. How does your property loan lock-in period affect you?


What is a Lock-in Period?

A lock-in period is a period whereby you cannot settle off your entire property home loan. If you settle off the entire property home loan during that period, you will need to pay a penalty clause.

E.g. Loan amount: RM450,000
Exit penalty: 3% x 450,000 = 13,500



What Should I Be Looking for in My Home Loan Agreement?

The loan lock-in period is typically 3 years. You may be able to negotiate for a shorter lock-in period.


Draw down (disbursement) date

You need to be careful of the loan agreement fine print whether your lock-in period is calculated from the first draw-down OR the last draw-down date. For a property that is under construction, the draw-down date makes a significant difference on how the lock-in period is calculated whether from the date the first payment is made by the bank to the developer OR only when the full draw down is paid by the bank to the developer.

E.g. Property construction begins: Y2016
Lock in period: 3 years (from last draw-down date) – If final disbursement given in April 2018, you can only sell with no penalty only after April 2021
Lock in period: 3 years (from first draw-down date) – If first disbursement given in March 2016, you can only sell with no penalty only after March 2019


Penalty calculation

The exit penalty can be calculated either based on the total original loan amount OR the outstanding loan amount. Calculating based on the outstanding loan amount would reduce the penalty that you would need to pay.

E.g. Loan amount: RM450,000
Outstanding loan amount: RM420,000 (RM30,000 principle paid off)
Exit penalty based on total loan amount: 3% x 450,000 = RM13,500
Exit penalty based on oustanding loan amount: 3% x 420,000 = RM12,600



Are There Options with No Lock-in Period?

Yes, there are banks that offer options with no lock-in periods, especially for Islamic home loans.



Simplify My Personal Finances

If you are confident that you will be holding on to your property for at least 5 years, you can focus more on getting the best loan rates instead of lock-in period related matters. It does not hurt though to ask if you can get a better deal.

If you may be selling off your property in less than 5 years (especially if within 3 years), your lock-in period may have a significant impact on your property investment returns. Calculate the impact when choosing between property loans, and go with one that best suits your needs after factoring in lock-in periods and applicable penalties that is beneficial to you.


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