Definition
Lock-in Period
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A lock-in period is a period of time within the tenure of a home loan in which repayment of the loan would result in penalty charges incurred by the borrower.
The penalty fees can come as either a cancellation fee, break costs or a redemption fee.
This lock-in period is usually active during the initial few years of the loan’s lifetime.
With fixed rate home loans, the lock in period is almost always during the years where the fixed rates are applied.
For example, a fixed rate housing loan with the first 3 years at 2% and thereafter SIBOR + 1% would have the lockin period during the first 3 years of fixed rates.
If the lock-in period comes with a 1% penalty, a borrower with a $250,000 loan would incur a $2,500 penalty fee.
While this looks like a hefty penalty, it can be worthwhile if the borrower has found a much better loan or that he has decided against buying the property altogether.
Floating rate mortgages can also have lock-in periods, but can also be non-existent.
This really depends on how the lender decides to design their loan packages.
For under construction property loans, which refer to loans for property that are still under construction, mortgages usually don’t come with any lock-ins. But some banks still do enforce a lock-in period.
Sometimes, home loans comes with no lock-in periods, but borrowers would still have a legal clawback feature to contend with.
This indirectly acts as a lock-in period as the borrower would still have to incur penalties should the loan be redeemed within the legal clawback period.
Mortgagors are usually interested in lock-in periods because they have a view of refinancing their home loans.
As the main motive of refinancing is to save on interest costs, incurring penalty charges can make any savings made from replacing their current loans with a new one redundant. It would be more worthwhile to wait out the lock-in period before refinancing.
This is also why homeowners should review where the breakeven point is before signing up for a new loan.
If for example refinancing can help a borrower save $100 a month compared to the existing loan, a penalty for breaking the lockin period of $3600 would mean that the breakeven point is in 3 years, then it might not make sense to go ahead.
The reason being that it would have too long a time frame. One might even have better deals to consider during the 3 years of waiting.
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