Is there penalty on full early repayment of my housing loan? Should I pay off my mortgage early?
Financial institutions may impose a penalty on full repayment of loan. Normally there will be penalty charges for early loan settlement.
Depending on the financial institution, penalty charges will range between 2-5% of the outstanding amount. Any waiver of penalty fee is strictly at the discretion of the financial institution. The charges that are made will depend on the type of product you have chosen and when you decide to redeem your loan.
Generally, the penalty imposed can either be a flat rate 1 or an 'x' number of months' of interest (e.g. 1 month's interest). This is because when a loan is granted for a certain term, the financial institution would expect the loan to be repaid over the period agreed and has planned their cash flow on this basis. An early termination of the loan would therefore disrupt the financial institution's cash flow planning.
As such, some financial institutions do not charge a penalty if sufficient notice is given (as stated in the terms and conditions of the loan) or if the settlement is made after the required minimum period to maintain the loan with the financial institution has passed.
Note that in some loan packages, there are certain minimum periods you need to observe before full settlement is allowed.
- Flat Rate - A term used to describe interest that is charged as a fixed percentage of the loan amount throughout the tenure of the loan. The flat repayment amount is usually determined before the commencement of the repayment programme. For example, interest charged on a RM10,000 loan at a flat rate of 10% per annum is RM1,000 annually until the loan is fully settled.
Reprinted with permission from BankingInfo (A Consumer Education Programme by Bank Negara Malaysia)
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