Buying a house usually requires us to apply for a loan. And it goes without saying that people often choose their loan under two sets of criteria—low interest rate and shorter loan tenure.
The importance of a lower interest rate is self-explanatory, while the length of your loan tenure determines how long you need to service your loan. Incidentally, the longer the loan tenure, the more interest you will have to pay.
With that said, there is another element of the loan that we may have overlooked, and that is the loan lock-in period.
What is the loan lock-in period
The lock-in period could last anywhere from two to five years, depending on your loan, and you are subjected to a penalty should you decide to clear off the loan completely. The penalty rate can be around 2% to 3% of the loan amount. Hence, you will need to pay a penalty of RM21,000 for a RM700,000 loan, assuming that the rate is at 3%.
Why is this important?
Oftentimes, homeowners refinance their house to take advantage of the drop in interest rate, or to increase cash flow. If these two circumstances happen within the lock-in period, you are essentially tied down by the exit penalty.
Shorter is better
The general rule is to choose a loan with a shorter lock-in period and a lower exit penalty, as it allows better flexibility to accommodate your contingency plans. Or better, get a loan that does not have a lock-in period. Even so, a loan without a lock-in period may have a higher interest rate, so take that into consideration. The interplay of all these properties, interest rate, lock-in period and loan tenure, have to be taken into account to match your needs.