Counting the cost of loan moratorium
It is important for borrowers to know their cash flow when deciding to opt in or out
KIM and her husband have more than four housing loans spread over different banks. They were very happy when Bank Negara announced on March 25, that banking institutions would offer a deferment of all loan/ financing repayments for six months, effective since April 1.
The offer was part of the government’s initiatives to help individuals, small and medium-sized enterprises (SMES) and corporations to manage the fallout from the Covid-19 pandemic.
All SME loans and loans held by individuals – which include auto, housing, mortgage, personal loans and financing – will be given the automatic six-month deferment period.
Kim contemplated continuing with the installments and contacted the banks to get a clearer picture what that would involve.
“Two of the banks reverted with a set of frequently asked questions. I would rather talk to someone about it. But it seems as though it was easier to accept the offer than to opt out of it,” says Kim.
Besides having to deal with each of the banks they had taken loans from, two of the four banks were located outside of the Klang Valley.
Kim had loans from bank branches in Seberang Prai, Penang and Kota Baru, Kelantan, having spent time in both these places. She is now spending more time in the Klang Valley.
Finally, she decided it was more convenient to let it be rather than work towards opting out of moratorium.
“To continue to pay over these six months seem so inconvenient; to take it up was so convenient. I don’t have to do anything,” Kim says.
There is a cost to that convenience. Financial planner Robert Foo says the cost of the deferment depends on the loan amount, at which end the borrower is in currently in terms of the loan tenure, and how the loan is structured.
”If the borrower is at the 18th year of a 20-year tenure, the impact will not be great because the outstanding amount will not be much. But if he has just started paying the first couple of years, and has a substantial amount outstanding, the interest will be calculated based on that amount. This means he will have more interest to pay at the end of the day,” he says.
Like Kim, many have gone with the flow. “It was during the movement control order (MCO) and many had various issues to settle. We were in an unprecedented situation.
“Many, borrowers and non-borrowers do not understand the concept of the time value of money. This is a generic term. If you do not pay now, the interest is compounded and you end up paying more later.
“A housing loan borrower or anyone who has a bank loan cannot say, ‘I don’t have to pay interest (during the six months). The question is, when do you have to pay that interest?
“The loan is already running. A borrower cannot say the bank does not charge interest. The bank has customers who have money in fixed deposits. Who is going to pay them during these six months?
“The loan continues to run. The only difference is, between April and September, the bank is not issuing a letter of demand. If a borrower fails to pay for six months, it will fall into the non-performing loan (basket) but because of this unprecedented situation we are in, the banks are offering a six-month deferment as temporary relief,” says Foo.
As far as Kim and her husband are concerned, when October comes, they will continue to pay their loans like before and their tenure for all loans would be extended by a further six months.
Working towards your goal
Another financial planner Winnie Kiew says she accepted the deferment programme because she needed time to sort out her cash flow.
The bank emailed her seeking a decision. She only needed to click opt in, or out.
If the six-month deferment is further extended by either three or six months, Kiew says she would not want it.
On Thursday, Starbiz published an analysis on whether the loan moratorium should be extended and the implications.
Anecdotal evidence based on user reaction to news of a targeted extension, instead of the current situation where all borrowers can have a deferment, shows that a large number of borrowers want an extension.
Kiew says: “This period of six months is sufficient for me as an individual to adjust my cash flow position. I told myself, I must, I have to find a way (to improve my cash flow position).”
Based on the example of an outstanding amount of RM500,000, with an interest rate of 4.36%, Kiew says the monthly interest would be RM1,816.667 (500,000 x 4.36% divided by 12). Over a period of six months, that works out to unpaid interest of RM10,900.
This amount will be added to the outstanding amount, which will swell it to RM510,900. This is a simple example. The question is, how is the loan structured. The borrower will have to get clarifications from the bank.
The next question is, will the bank charge the borrower interest on this outstanding interest amount of RM10,900?
Kiew calculated that her six-month deferment will further extend her loan tenure by 18 months. She has already paid five out of the 25-year loan.
She will also be paying additional interest amounting to about RM33,000.
“Because many have suffered a pay cut, or lost their jobs, most would opt for this deferment. If not for my personal situation, I would rather have short-term pain rather than lon- term pain,”
Kiew says.
Wong Fook Ming, in his 50s, who is in the publishing sector sector, started his loan six years ago. Like Kim, he is relieved there is this option for his housing loan.
His rationale: He has used his credit card to do up his new house which he moved into late last year. The interest for his credit card is about 18% per year, which is higher than his 4.37% a year housing loan. He will take the money for the six-month housing installment to settle his credit card bills and for investment purposes.
When pointed out that his loan tenure and total interest paid will rise, Wong says: “I have taken a flexi loan. This allows me to pay towards the outstanding amount as and when I have saved up enough.
“So I went into this deferment after having calculated the cost and what I can do to mitigate the situation,” Wong, who has a degree in applied finance, says.
He has only one housing loan and believes that once his credit card bills are settled, he will focus on reducing his housing loan amount as fast as he is able.
Push and pull factors
There are different push and pull factors that determine why people opt out of a deferment.
Financial planner Apryl Loo continues to pay for the investment property but took a deferment for the house she is living in because the loan is bigger.
If the bank were to extend the current six-month moratorium, she will continue to opt for the extension in order to resolve her cash flow situation.
“Actually, if one can manage their cash flow situation, there is no need to take a deferment because you will be dragging on loan considerably,” Loo says, adding that she will have to pay about 18 months more because of this deferment. She has already paid 10 out of the 35-year loan.
While Loo took a deferment for the property she is living in and continues to pay for her investment property, Roiree Chin, took a deferment for her investment property. She opted to continue paying the mortgage for the house she is living in. Chin is also a financial planner.
She has paid eight out of the 30-year loan. She is deferring payment for the investment property, also on a 30-year tenure, which she has been paid for six years.
“I plan to sell the house and I am willing to make a smaller profit from it, rather than forking out my own cash,” she says.
Going along with the deferment means incurring more debts, Chin says.
“Many do not understand their cash flow situation. They think they cannot afford it when in reality they can. I, being an spectator, do not know how much savings they may have.
“If they can continue to pay for the installments, I see no reason why they should seek a deferment because at the end of the day, they will be incurring higher debts.
Holistically, in the broad context of financial planning, she has come across many who wants to save RM10 or RM15 when making a purchase, but do not seem to mind paying the higher interest incurred that comes with the six-month deferment.
“Many think of ways and means to make more money, instead of how to save more money,” says Chin.
While non-civil servants try to come to balance their financial situation, a civil servant in Sibu, Sarawak, who only wants to be known as Tina says she was not given the option.
“I took a loan from the government, at 4% interest in 2012. I continue to get my full salary and I am very glad I have a job. Even if I were given that option to defer paying my mortgage, I will not take a deferment. I do not want to incur more debts.
“However, if I am not wrong, there are civil servants with loans from private banks who may be given that option,” Ting says.