Table of Contents
Bank mortgage penalty periodWhat is
The bank mortgage penalty period refers to a specific period (usually 1 to 3 years) specified by the bank in the mortgage contract. If the borrower repays the loan in full or part of the loan in advance during this period, the bank will charge additional fees (called "penalty interest" or "early repayment fee") according to the terms of the contract. This mechanism is mainly used to protect the bank's interest income and prevent the bank from losing expected profits due to early repayment by borrowers, so as to protect the bank's expected interest income. It is a mechanism for banks to balance risk and return. Borrowers should fully understand the relevant terms when applying for a mortgage to avoid unexpected expenses when repaying the loan early in the future.
Key points of the penalty interest period:
- Purpose
When a bank provides a mortgage, it expects to earn interest income during the loan period. If the borrower repays the loan early, the bank needs to reallocate funds and may face the risk of interest rate fluctuations or idle capital costs. The penalty period can offset this potential loss. - Common deadlines
- Hongkong: Most banks set a 2-year penalty interest period.
- Other areas: According to market practice, it may vary from 1 to 3 years. Please read the contract carefully.
- Penalty interest calculation method
- According to the remaining principal ratio: For example, in the first year of the penalty interest period, 2% of the loan balance will be charged, and in the second year, 1%.
- Percentage of outstanding interest: For example, "compensation for 6 months' interest".
- Tiered Computing: The higher the early repayment amount, the higher the penalty interest rate may be.
- Exceptions
Some banks allow a small amount of loan to be repaid early each year for free (such as 5%-10% principal per year), and penalty interest will only be charged on the excess amount.
example:
If the loan agreement stipulates:
- Penalty interest period: 2 years
- Penalty interest rate: 3% in the first year, 2% in the second year
- Loan balance: HK$1 million
If the borrower repays the loan in full in advance in the first year, he/she will be required to pay penalty interest:
1 million × 3% = HK$30,000
Note:
- Read the contract carefully: Penalty interest regulations, exemption conditions, and calculation methods may vary from bank to bank.
- Long-term planning: If there is a short-term resale or refinancing plan, the penalty interest cost needs to be assessed.
- Consult professional advice: You can clarify the details with a lawyer or financial advisor before signing the contract.
1. Common rules for penalty interest period
Duration
- Most banks set a two-year penalty interest period, and some banks may shorten it to one year or extend it to three years.
- Early repayment (including partial or full repayment) during the penalty interest period may trigger penalty interest.
Penalty interest calculation method
- Penalty proportional to loan balance:
- Penalty interest in the first year: usually 1%~3% of the remaining principal (e.g., if the loan balance is 5 million, the penalty of 1% is 50,000 yuan).
- Penalty interest in the second year: The ratio is usually reduced (for example, 0.5%~1.5%).
- Calculated by interest loss:
A few banks will use "interest losses caused by early repayment" as the benchmark, but this is seldom seen in practice.
Additional costs
- Cash rebate recovery: If the bank has provided mortgage cash rebates (such as 1%~2%), if you refinance or sell the property during the penalty interest period, you must refund the full amount or a proportionate amount.
- Handling fees: Some banks charge thousands of dollars in administrative fees.
2. Common situations that trigger penalty interest
Selling/transferring property
- Even if the buyer takes over the original mortgage, if the ownership changes (such as transfer of name, sale), the bank may regard it as a termination of the contract and trigger penalty interest.
Refinance
- If you switch to another bank during the penalty interest period, the original lending bank will charge a penalty, and the new bank may require you to subsidize this fee.
Early loan repayment
- Partial repayment (such as shortening the repayment period) or full repayment may trigger penalty interest, and the contract terms need to be confirmed.
3. How to avoid penalty interest?
Choose a bank with a shorter penalty interest period
- Comparing the length and proportion of penalty interest periods of different banks, some small and medium-sized banks may have more relaxed conditions.
Postponement of mortgage refinancing or property sales plans
- If you need to refinance, it is recommended to wait until the penalty interest period is over before doing so, and use the cash rebate from the new bank to offset the cost.
Confirmation clause before partial repayment
- Some banks allow a small amount of early repayment each year (such as 5%~10%) without penalty interest, so please check in advance.
4. Example reference
- Case 1: Mr. A sold his house in the first year of the penalty interest period, with a loan balance of 4 million. The bank fined him 2% (80,000 yuan) according to the contract and recovered 1.5% cash rebate (60,000 yuan), with a total cost of 140,000 yuan.
- Case 2: Bank B allows early repayment of the principal of 10% each year without penalty interest, and the borrower repays the loan gradually over three years to avoid triggering penalties.
V. Important Reminder
- Read the contract terms carefully: Penalty interest rules vary from bank to bank. Be sure to confirm the "penalty interest period length", "cash rebate refund conditions" and "partial repayment restrictions" before signing the contract.
- Seek professional advice: If you are planning to refinance or sell your property, you can consult a mortgage agent or lawyer to assess the cost-benefit.
If you plan to refinance or sell your property in the short term, it is strongly recommended to avoid the penalty interest period or choose a bank with a lower penalty interest rate to reduce additional expenses.
Pay off part of the mortgage bank penalty interest period
| bank | First Year | Year 2 | Year 3 |
|---|---|---|---|
| East Asia | Repayment amount 1% (Minimum $1,000) | No penalty interest is required, but the minimum repayment is NT$50,000, and the remaining loan amount cannot be less than NT$50,000 | not applicable |
| Bank of China | 1% | After early repayment, you need to maintain at least 24 installments | not applicable |
| transportation | 2% | 2% | not applicable |
| CCB | 2% | Cash Rebate | not applicable |
| Creation | 1% + Cash Rebate | Cash Rebate | Each partial repayment after the penalty interest period is at least $50,000 and needs to be notified to the bank in writing one month in advance. A handling fee of $1,000 will be charged each time. |
| Friends (2-year penalty interest plan) | 2% | 1% | not applicable |
| Friends (3-year penalty interest plan) | 3% | 2% | 1% |
| Citigroup | 2% or cash rebate (whichever is higher) | Cash Rebate | not applicable |
| CITIC | 2% | 1% | Each early repayment must be a multiple of 50,000 yuan, and a penalty interest of 1,000 yuan must be paid each time. |
| DBS (2-year penalty interest plan) | 2% | 1% | not applicable |
| DBS (3-year penalty interest plan) | 3% | 2% | 1% |
| Daxin | 2% | 1% | not applicable |
| Fubon | 2% | 1% | not applicable |
| Hang Seng | Cash rebate (based on repayment ratio) | Cash rebate (based on repayment ratio) | Partial repayment after the penalty interest period will be charged a handling fee of $800 each time (If you are a Prestige Banking customer, the first repayment after the penalty interest period will be automatically exempted from the first $800 handling fee) |
| HSBC | Two installments of interest and cash rebate calculated based on the early repayment amount | If the repayment reaches 90% of the loan amount within two years, it will be calculated as full repayment | not applicable |
| ICBC (Asia) | 1% + Cash Rebate | Cash Rebate | not applicable |
| Nanshang | 1% | Cash Rebate | not applicable |
| overseas Chinese | 1% | 0.5% | not applicable |
| Yonglong | 3% | 2% | not applicable |
Pay the full mortgage and the penalty interest of each bank
| bank | First Year | Year 2 | Year 3 |
|---|---|---|---|
| East Asia | 2% + Cash Rebate | 1% + 50% cash rebate | not applicable |
| Bank of China | 1% + Cash Rebate | Cash Rebate | not applicable |
| transportation | 2% | 2% or cash rebate | not applicable |
| CCB | 2% | Cash Rebate | not applicable |
| Creation | 1% + Cash Rebate | Cash Rebate | not applicable |
| Chiyu (2-year penalty interest plan) | 2% + Cash Rebate | 1% + 50% cash rebate | not applicable |
| Chiyu (3-year penalty interest plan) | 3% + Cash Rebate | 2% + 50% cash back | 1% |
| Citigroup | 2% or cash rebate (whichever is higher) | Cash Rebate | not applicable |
| CITIC | 2% + Cash Rebate | 1% + Cash Rebate | $1,000 |
| DBS (2-year penalty interest plan) | 2% | 1% | not applicable |
| DBS (3-year penalty interest plan) | 3% | 2% | 1% |
| Daxin | 2% | 1% | not applicable |
| Fubon | 2% | 1% | not applicable |
| Hang Seng | First year: 3% The following year: 2% | Cash Rebate | not applicable |
| HSBC | 1% + Cash Rebate (Depending on the rebate amount) | Cash Rebate | not applicable |
| ICBC (Asia) | 1% + Cash Rebate | Cash Rebate | $1,500 |
| Nanshang | 1% | Cash Rebate | not applicable |
| overseas Chinese | 1% + Cash Rebate | 0.5% + Cash Rebate | not applicable |
| Yonglong | 3% | 2% | $1,000 |
1. Calculation of the end time of the penalty interest period
Basic principles:
- 2-year penalty interest period: requires the completion of the 24th installment (i.e. after the 24th installment is completed, it ends when the 25th bill appears).
- 3-year penalty interest period: Requires completion of 36th installment (ends when 37th bill appears).
- Verification method: The "number of payments made" on the monthly mortgage payment slip shall prevail.
When to apply for refinancing:
- You can apply for a mortgage refinancing three months before the end of the penalty interest period (for example, if the penalty interest period is 2 years, you can apply after the 21st period).
- The law firm and the bank will coordinate time to ensure a seamless transition between the old and new mortgages and avoid penalty interest.
2. Interest calculation method affects the cost of refinancing
| Interest calculation method | Impact on refinancing | Recommended action |
|---|---|---|
| Daily interest | The interest is calculated based on the actual number of days the loan is borrowed. After the mortgage transfer, only the interest up to the day of transfer will be paid. | You can choose the refinancing date flexibly, but you need to arrange the settlement date accurately (for example, refinancing the day after the payment date). |
| Monthly Interest | If the fund is not transferred out on the contribution day, even if it is paid one day in advance, you will still need to pay the full month's interest (interest will be paid by both the new and old banks). | Be sure to set the refinancing settlement date as the "original payment date" to avoid overpaying interest. |
3. Handling of special situations
Changing property during the penalty interest period:
- Conditions for no penalty interest: Some banks allow changing properties without penalty interest, but the mortgage of the new property must be kept in the original bank.
- Note: Even if there is no penalty interest, the cash rebate on the new mortgage may be deducted, and the costs need to be evaluated comprehensively.
Ditch the guarantor (during the penalty interest period):
- Most banks allow the removal of the guarantor without penalty interest, but may require the penalty interest period to be re-bound (for example, for another 2 years).
- Bank policies may be adjusted due to market conditions, so it is recommended to confirm the terms in writing in advance.
The impact of refinancing on your credit history:
- If you transfer your mortgage during the penalty period, you only need to pay a penalty, which will not affect your credit score and the bank will have no negative record.
4. Zero Penalty Interest Mortgage
- Applicable circumstances: Some banks may waive the penalty interest period when offering a "zero rebate" mortgage plan.
- Trade-offs: You need to give up benefits such as cash rebates, which is suitable for borrowers who plan to refinance or sell their property in the short term.
V. Practical Suggestions
Confirm the interest calculation method: proactively inquire about the interest calculation model (daily interest/monthly interest) from the original bank to avoid paying too much interest when transferring the mortgage.
Accurately arrange the delivery date:
- If the interest rate is monthly, be sure to set the refinancing settlement date to the original payment date.
- Confirm the process time with the law firm and new and old banks in advance (usually takes 2-3 months).
Written confirmation terms: For special needs such as changing buildings or giving up collateral, the bank’s written consent should be obtained to avoid disputes.
Through the above planning, you can effectively avoid penalty interest costs and maximize the financial benefits of refinancing or changing properties. If there are further details that need to be clarified, it is recommended to consult a professional mortgage advisor or lawyer.
