Due to the Covid-19 outbreak, the Monetary Authority of Singapore (MAS) has told banks they must allow certain home loan deferment. This includes monthly home loan repayments. However, just because this option is now available, does that mean you should rush for a deferment? Here are the key things to consider:
HOW DOES A HOME LOAN DEFERMENT WORK?
Starting from 6th April, you will be able to approach your bank and ask for deferment on your monthly home loan repayment. You are able to defer repayment until 31st December 2020.
The only uniform requirement is that you must not be more than 90 days late on any previous loan repayments, as of 6th April. You do not have to show any proof that your income has been affected by Covid-19.
THAT SOUNDS GREAT, WHY NOT DO IT STRAIGHT AWAY?
The home loan deferment granted by the bank is not “free”, and you will end up paying for it later. There are two main ways to defer your home loan:
(1) Defer principal payment on your loan, or
(2) Defer both principal payment and interest payments.
1. DEFER PRINCIPAL PAYMENT ON YOUR LOAN
With this option, you are only paying the interest portion on your home loan, and not amortising it (i.e. you are not paying down the original amount that you borrowed).
To understand this, you need to know that there are two parts to a loan repayment:
The first part, the principal repayment, goes toward paying down the original amount that you borrowed. The second part, the interest portion, is used to pay down the interest that accrues on your principal.
Let’s say you have a home loan of $1 million, at around two per cent per annum for 30 years. The usual loan repayment amount will be about $3,700.
Of this $3,700, around $1,600 will be used to pay the interest portion, and the other $2,100 will be used to amortise (pay down) your principal.
So if you were to defer the principal payment, that would mean you only pay the interest ($1,600 per month) for your home loan. Let’s say you do this for six months, paying interest repayments of $9,600.
After those six months, you will owe…$1 million still.
That’s because you’ve only been paying off the interest, and your original debt is untouched. When you finally get around to repaying the full amount, you would have forked out an extra $9,600 on top of it.
2. DEFER BOTH PRINCIPAL PAYMENT AND INTEREST PAYMENTS
This means you are deferring your entire monthly repayment. This also means you are extending your home loan tenure by the length of the deferment period.
Here’s what happens in this situation: the bank will forego your repayment, including your $9,600 in interest, for now.
But later on, this $9,600 will be added to your overall debt (your principal), and you’ll be charged interest on it. In other words, it’s as if your original debt becomes $1,009,600 once normal repayments resume. And yes, that can mean your future monthly repayments will go up.
The maths behind this can get a bit complex, so ask the mortgage banker to crunch the numbers for you before you apply or contact me about your home loan, and I can work it out with you.
SO SHOULD YOU APPLY FOR IT?
It does mean you’re paying more for your house in the end, so it’s highly situational. Paying more for your loan will eat into your resale gains; and you’d have to weigh the eventual costs against the benefits of having more cash right now.
(Of course, if you pay for your home loan with your CPF, you can’t touch the money anyway; so just don’t defer unless you truly have to).
For homeowners who are in dire straits, a loan deferment for six months – coupled with some steps like renting out rooms – could make the difference between keeping the home and having to sell.
The objective of this measure is to allow homeowners who may have lost their jobs or massive reduction in income to tide over this trying period.
In either case, do drop me a message so I can work out an overall solution for you. If I can understand your financial needs and situation, I can better determine if deferment can help you.
Overall, this is a good move by the government. Singapore’s homeowners will feel more secure knowing they have loan deferment as an added “safety net”, while the outbreak is ongoing. This has inevitably helped save many homeowners from having to “fire sale” or force sell their homes.