Thursday, October 17, 2013

My Home Loan Application Mistake - Ignore Lock-in Period

I just want to share with you guys on 1 mistake that made in my home loan application. The mistake is "I did NOT really negotiate the lock-in period" condition when I accepted the loan offer.

Note: Lock-in period is the period where you cannot settle your loan. If you do, then you will need to pay the penalty fee. 

The reason I didn't do that is because I didn't plan to sell the house in short term and I bought it for own staying. So I put "No Effort" at all to negotiate this lock-in period. Whatever the bank offered me, I just accepted it.

But in personal finance, you always plan on the worst case and in this case, I failed to do that. :) Thing changes especially it is > 2 years, okay I learn that now.

There are few things that you can negotiate and different bank may offer you different condition for this lock-in period. Let's see what you can negotiate here:

(1) Lock-in Period 

In Malaysia, the lock-in period is usually between 3 to 5 years. Try to negotiate for 3 years. My recent loan is just 3 years. So I was lucky, I didn't bother but got the minimum lock-in period. :)

(2) First Draw Down vs Full Draw Down

If your lock-in period start date is based on the full draw down, you should always negotiate it for first draw down instead. For example if your lock-in period is 3 years:

First draw down - 2013
Full draw down - 2015

If based on first draw down, your lock-in period ends in 2016 but if it is based on your full draw down, it ends in 2018. You basically waste your 2 years!!! Fortunately, my case is based on first draw down. I believe most banks do?

(3) Penalty on Outstanding vs Original Loan

Penalty % is usually standard, I think is 3%. The most critical thing is whether the penalty is based on outstanding or original loan. This is the part I was unlucky. :( Too bad, my loan is based on original total loan! :(

It is important that you better negotiate for penalty based on the outstanding loan especially you are cash rich. In example below, you can save $12K!

Loan Amount - $800K
Outstanding Loan - $400K

Penalty on original loan - $800K X 3% = $24K
Penalty on outstanding loan - $400K X 3% = $12K

[Update]: My lock-in period's penalty fee is 2% not 3%. Not sure why I remember wrongly. At least this is something lucky for me! :) 


So, which one has the highest priority? I don't know, I think all 3 are equally important. You can just negotiate all these 3 together to get the minimum penalty as possible! Good luck and don't repeat my mistake! :)

P/S: Do you know car loan is always 1.9X of housing loan? Check this out here!!!

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