HDB Loan Lock-in Period: Safeguard your Interest
HDB loan in Singapore is an arrangement by the government to provide houses and housing loans to the residents at concessionary rates. The main goal of HDB (Housing & Development Board) is to provide affordable housing to Singaporeans.
The interest rate of HDB loan is 2.60% p.a. which is reviewed on the 15th day of every month. Whereas if the same loan is applied through a bank, it is 1.2% to 3% per annum.
Fixed interest rate
A fixed-rate of interest means the interest rate you would be paying for your mortgage remains the same for the whole term. In this case, the repayment amount of the loan is the same. It is easier for you to estimate the repayment amount and maintain a budget.
Floating interest rate
In Singapore, there are generally 3 types of floating rates: board rates, SIBOR floating rates, and fixed deposits. The floating rate may go up and down depending upon the market conditions and other factors.
HDB Loan Lock-in Period
A lock-in period is a specific period of time a bank guarantees a specific interest rate to the borrower. This acts as a safeguard against any fluctuations in interest rates during that period of time. To retain that rate, you need to close your loan in that particular period.
HDB does not guarantee a lock-in period at all. But you may definitely get one if you are applying for an HDB loan through a bank. Banks offer a lock-in period and also assure a lower interest rate.
The lock-in period provided by the banks is generally 2-3 years. The interest rate does not change throughout that duration.
There are certain variants of HDB loan provided by the banks:
Fixed rates with lock-in
Floating rates with lock-in
Floating rates with no lock-in
Penalty fee for a lock-in period
The Lock-in period has certain benefits for you but in case you want to pay off the whole amount of the loan, refinance it or sell your property, you will have to pay some amount as a penalty. A lock-in period comes with a list of terms and conditions.
According to those T&C, if you withdraw the agreement during the lock-in period, you will have to bear the penalty. This means during this period, you can not think of selling or refinancing your loan from some other bank. This ties you to the bank that offered you the mortgage and lock-in period.
The penalty fee is not fixed just like the term of the loan. But it is somewhere between 2-5% of the total outstanding amount of the loan.
For example, you took a loan for S$ 5,00,000 and you want to sell your house. The outstanding payment is let’s say 4,00,000. The penalty fee for the same could be:
2% of 4,00,000 = S$ 8000
5% of 4,00,000 = S$ 20,000
Impact of lock-in period on your loan
Taking a loan is a serious and lengthy process. It requires a lot of research, analysis, and understanding.
The Lock-in period as you can see in the above example should be considered before getting a loan. Also, if you want to refinance your loan, sell your property, or pay the full amount of the loan in a go.
The extra amount that you would be paying as a penalty has a great impact on your choices of taking a loan. It affects your buying decisions. You may have an urgent need for funds and have to sell your property.
There are other main things to evaluate while taking an HDB loan from a bank such as interest rate, term of repayment etc. But talking about a complete package, only an expert can guide you about that.
HDB Loan: With or Without a Lock-in Period?
Comparison is necessary when it comes to financial decision-making. By maintaining the loan at the same rate for a period of time makes a difference in the total amount of interest to be paid. An extra interest rate may cost you more in the long run.
You may go for a lock-in option when the interest rates are low. This counts for a bigger saving during the lock-in period. Hence, it is better to take advice from an expert at this so that you are clear on what to opt for: lock-in or no lock-in?