Redemption Penalty

What it is

A redemption penalty applies when you pay off your entire outstanding mortgage before the loan tenure naturally ends, for example because you sold the property, refinanced to a different bank, or simply had the cash to clear the loan outright. Banks build this fee into many packages, particularly ones with attractive early rates, to recover some of the cost of setting up the loan if you leave before the lock in period is over.

How it works

The redemption penalty typically only applies during the loan's lock in period, commonly the first two to five years, which often lines up with a fixed rate stretch on the same loan. Once the lock in period ends, most borrowers can redeem the full loan without this penalty. Some banks also apply a separate, smaller fee if you switch banks specifically, sometimes described differently from the general redemption penalty, so the fine print matters. Exact percentages and structures vary by bank and change over time, so this page describes the mechanism only rather than any specific figure.

A simple worked illustration

Say a buyer takes a loan with a three year lock in period and decides, in year two, to sell the property and clear the outstanding loan of roughly 700,000 dollars. If a redemption penalty applies during the lock in period, the bank might charge a percentage of the outstanding loan as a fee, adding a real cost to selling or refinancing early. In year four, after the lock in period has passed, the same full repayment would typically carry no such penalty. This is a general, made up illustration of the mechanism, not a quoted fee from any bank.

What first time buyers get wrong

• Not checking whether a redemption penalty applies before agreeing to a package, especially if there is a real chance of selling or refinancing within a few years.
• Assuming the penalty is the same across all banks and packages, when the structure and rate can differ meaningfully.
• Confusing a redemption penalty on the full loan with a separate charge sometimes applied to a partial prepayment, which is a related but different fee.

What to check

Before signing a Letter of Offer, ask exactly how long the lock in period runs, whether a redemption penalty applies, and how it is calculated. If you expect to sell or refinance within a few years, weigh that risk against any attractive early rate the package offers. Confirm the current terms directly with the bank, since Winfred does not recommend a specific bank or package here.

Winfred Quek is an Associate Marketing Consultant at Crestbrick Pte Ltd (CEA Licence No. L31010886H). CEA R073319H. This page is for general information only and does not constitute financial, investment, or legal advice. Verify current figures with IRAS, HDB, CPF Board, or MAS before making any decision.