Mortgage Loan Terms – What does it mean?
Here are the explanation for the different terms you would commonly see in a bank’s letter of offer.
Commitment Period (Lock-in Period)
Like signing a mobile phone contract from a telco, you are “stuck” with the bank for that particular period. If you choose to partial/full redeem the loan within this lock-in period, the banks will typically charge a 1.5% on the prepayment amount(partial payment) or 1.5% on the outstanding loan amount (full loan redemption). Some banks like DBS may split it into the following format:
Admin fee: 1% of original loan amount
Commitment fee: 0.5% of outstanding loan amount.
Sometimes banks may give a special clause which will be stated in the letter of offer for waiving the commitment fee in the sale of property. For fee structure like DBS, the Admin fee would still apply even when the clause is given.
If you decided not to use the loan after you have signed the bank’s letter of offer. The bank will usually charge a 0.75%-1.5% of the loan amount stated in the letter of offer. For under construction property, while the loan is not yet fully disbursed under the progressive payment scheme, you decided to refinance the loan to another bank or sell the property off due to some reasons, bank will also levy cancellation fee on the undisbursed loan amount.
Here’s an example:
Alan took up a $1 million loan from ABC bank for an uncompleted property he has just bought. Loan package has a 2 years lock-in period. After 1 year, he has to sell the property due to some financial difficulties, ABC has only disbursed $125k loan to date. Here is the penalty which the bank will be charging.
Lock-in penalty on disbursed loan amount : $125k * 1.5% = $1,875
Cancellation fee on undisbursed loan amount: $875k * 0.75% = $6,562.50
This is apart from the 12% Seller Stamp Duty (SSD) Alan has to pay for selling the property in year 2.
Interest Review Date
While most banks loan package do not have this, some banks loan package still do. The bank will levy a charge of usually 0.5% breakage fee if any partial/full loan redemption is not done on this particular date. This is slightly more complicated as it depends on your loan package. Let’s say your loan first disbursement is 1st January and you decided to make a partial payment of $100k.
If you miss the interest review date of 1st January, and
if you are on a 1 month Sibor/SOR package, the next interest review date is 1st February.
if you are on a 3 month Sibor/SOR package, the next interest review date is 1st April.
if you are on a 12 month Sibor package, the next interest review date is 1st January next year.
Breakage Fee for $100k would amount to $500 if you make the partial payment on any other dates. For sale of property, its very hard to control the loan redemption date (Sale completion day), thus some banks may include a clause for waiver of breakage fee due to sale of property.
Pls also note the following:
For partial payment, you would need to serve a 1 month written notice to the bank.
For full redemption, you would need to serve a 3 month written notice to the bank.
If you do not want to serve the notice, the bank will charge interest in lieu for the respective number of months.
Loan commencement date
When you signed the loan in e.g February and the loan only started in May. The May date is called the loan commencement date. Any benefits such as legal subsidy(refinancing) clawback period or lock-in period would start counting from this date and not the date on the letter of offer. Most people would not remember this date, you can call the bank to check on this date. Loan Commencement date will be also your Interest Review Date if applicable.