What is a lock-in period and should I be worried about it?

A lock-in period is a contractual clause in your mortgage agreement that restricts you from refinancing to another bank or making full early repayment of your loan without incurring a penalty. Lock-in periods typically last between one and five years, depending on the loan package.

During the lock-in period, if you choose to refinance with another bank, sell your property, or fully repay your loan, you will be charged an early repayment penalty. This penalty is usually calculated as a percentage of the outstanding loan amount, typically 1.5%. On a S$500,000 outstanding loan, a 1.5% penalty amounts to S$7,500, which is a significant cost.

Some packages also include a claw-back clause, which requires you to repay any legal subsidies or cash incentives the bank provided when you took out the loan, in addition to the early repayment penalty. The claw-back period is commonly 3 years from loan inception.

Lock-in periods serve an important purpose for banks. They ensure a minimum period of interest income to justify the costs of originating the loan, including legal fees, administrative expenses, and any introductory rate discounts offered. For borrowers, the trade-off is reduced flexibility in exchange for potentially more attractive rates or subsidies.

When evaluating lock-in periods, consider your medium-term plans. If you anticipate selling the property, upgrading, or taking advantage of falling interest rates within the next few years, a shorter lock-in period may be preferable even if the interest rate is slightly higher. If you plan to hold the property for the long term and rates are attractive, a longer lock-in with a lower rate could save you more overall.

Partial repayments are usually allowed during the lock-in period without penalty, though many banks cap partial prepayments at a certain amount per year (often 25% to 50% of the original loan amount). Always check the specific terms of your loan package.

Cashew's advisors factor lock-in terms into every recommendation, ensuring the total cost of the loan, including potential penalties, is considered alongside the headline interest rate.