Should You Opt In, Or Out, Of The Loan Deferment Programme?

In simple terms, a loan deferment is when you’re allowed to temporarily stop your loan or financing repayments for a certain period of time, and no late payment charges or penalties will be imposed on you.

While that move was made in order to ease any monetary burdens faced by individuals, small-medium enterprises (SMEs), and even the corporate sector during the Covid-19 pandemic, many were still left wondering one very important question: Even if regular repayments were allowed to be postponed, would the interest still continue to be accumulated?

The simple answer to that: Yes.

Note #2: BNM made the announcement in July 2021 that banks will not be charging compounding interest (interest on interest), nor impose any penalty interest during the 6 months. However, simple interest will continue to be charged and accumulate, on the deferred payments.

So, Should You Defer Your Loan Or Not?

Let’s take a look at a very simplified calculation for both the compounding interest and non-compounding interest, so you'd have a rough idea of how much either would cost you:

Compounding interest:

Now, let’s say you have a remaining balance of RM500,000 of your home loan to pay off, an interest of 4% per annum, and 351 months left on a 30-year tenure.

Your monthly instalment is approximately RM2,500, and you’ve decided to opt in for the loan deferment programme.

• 1st month (July): 500,000 x (4% / 12 months) = 501,667

• 2nd month (August): 501,667 x (4% / 12 months) = 503,339

• 3rd month (September): 503,339 x (4% / 12 months) = 505,017

• 4th month (October): 505,017 x (4% / 12 months) = 506,700

• 5th month (November): 506,700 x (4% / 12 months) = 508,389

• 6th month (December): 508,389 x (4% / 12 months) = 510,084

What this means is that, at the end of the 6-month programme, you’d actually be owing your bank a LOT more in the long-run; an additional whopping total of RM10,084, to be exact!

That additional accumulated interest will be 2.02% of the original outstanding amount of RM500,000.

Repayment of the additional interest could be done in one of either 2 ways; extended tenure (longer time to pay off the entire loan) or increased monthly repayments.

Non-compounding interest:

• 1st month (July): 500,000

• 2nd month (August): 500,000

• 3rd month (September): 500,000

• 4th month (October): 500,000

• 5th month (November): 500,000

• 6th month (December): 500,000 x (4% / 12 months) = 501,667

So, you think you’ll be able to pay off the RM10,084 over the remaining 345 months left on your home loan tenure, right? You might wanna think again.

This would work out to be an increase of roughly RM29 on your monthly instalment, starting from January. Thus, where your monthly instalment was once RM2,500, it’ll now be RM2,529!

It’s clear to see now why people are all in an uproar over what was supposed to be a move made to help people out with their finances in these uncertain and troubling times.

While that’s certainly one way to look at things, there are also a few other perspectives to consider.

For one, those who are facing an extremely short supply of cash right and choose to opt in, would actually be able to save RM15,000 (RM2,500 x 6 months), which could then be used for an emergency situation and/or vital necessities.

In addition, even those who aren’t facing any financial difficulties would still be able to benefit from opting in.

Yes, you read that right! Why not take that RM15,000 and put it into an investment fund, like Amanah Saham Berhad (ASB) or Unit Trust, that pays out more than a 4% return?

The accumulated monetary benefit of you making such an investment will actually outweigh saving that RM29 each month!

And finally, for those who bought a property to lease out but were unable to find a tenant, you’ve just been given 6 months to quickly look for one, without the stress of repayments.

Even if you’ve already got a tenant, the interest cost will actually be paid for by your tenant from January, all the way until the end of your home loan tenure.

Bear in mind that while opting in for a loan deferment will NOT harm your credit rating score in any way, it WILL be affected if you’re late or miss a single payment once you're back to your regular repayment schedule!

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