Following the news on banks allowing individuals to defer their mortgage loans, you might be wondering so what does this all mean for me? How much will I have to pay if I defer my loan? How much will my principal amount and interest be next year when my loan resumes? Should I even defer my housing loan?
It is not surprising to have so many question marks in your head. Fret not, we have an easy to understand guide to walk you through this seemingly complex matter.
Why Defer Your Mortgage Loan Payments?
Simply put, cash flow constraints may be a huge problem for you and you may be facing difficulties repaying your housing loan during this period of great financial distress. With monthly mortgage loan payments very likely to be a significant portion of your monthly financial commitment, being able to defer your mortgage loan payments (whether just the principal or both the principal and interest) will help ease your financial burden this year.
How Does It Work?
You can choose to defer just the principal portion of the monthly instalment or the full monthly instalment up to 31 December 2020. In the former, you will continue to pay interest only until 31 December 2020. In the latter, you will not pay anything until after 31 December 2020. However, interest will continue to accrue on the principal amount deferred. After the deferment period, the loan amount and interest accrued on the deferred principal will be fully amortised over the remaining loan tenure.
Too confusing? Let’s explain this with a scenario and some illustrations.
Option 1: Deferring the Principal Amount Only
Scenario: You have $500,000 outstanding on your housing loan with 20 years remaining at an interest rate of 1.90% per annum. You have been paying $2,505 for your monthly instalment, with $792 to repay the interest and $1713 to repay the principal. You decided to defer the principal amount for 7 months with effect 1 June 2020.
You will continue to repay $792 in interest every month from 1 June 2020 to 31 December 2020. This is 7 months worth of interest repayments. As such, you will repay $5,544 during this period. However, your outstanding loan is still $500,000 which will have to be repaid starting January 2021.
Will my Loan Tenure be affected?
DBS and UOB will not extend the loan tenure. In the case of OCBC and Maybank, you will have the option of extending the loan tenure by the corresponding deferment period.
The question then is: If you have the option of extending your loan tenure, should you?
Not extending the Loan Tenure
By not extending the loan tenure, you will have to repay the outstanding loan over a shorter period of time. In the case of the above scenario, you will now have to repay $500,000 over 19 years and 5 months. This will result in a higher monthly instalment.
Extending the Loan Tenure
By extending the loan tenure, you will now repay $500,000 over 20 years. Assuming the interest rate remains the same at 1.90%, your monthly instalment will remain at $2,505. As such, you end up paying $5,544 more in total by extending your loan tenure due to more interest incurred..
Hence, it is better not to extend the loan tenure if you do not need to as you will end up repaying a greater total amount in order to pay off your housing loan.
Option 2: Deferring both the Principal Amount and Interest (Full Monthly Instalment)
Scenario: You have $500,000 outstanding on your housing loan with 20 years remaining at an interest rate of 1.90% per annum. You have been paying $2,505 for your monthly instalment, with $792 to repay the interest and $1713 to repay the principal. You decided to defer the full monthly instalment for 7 months with effect 1 June 2020.
You will pay nothing from 1 June 2020 to 31 December 2020. The total deferred interest of $5,544 will be added to the previous outstanding loan of $500,000 which results in a new outstanding loan of $505,544. This new outstanding loan will then be re-amortised and have to be repaid starting January 2021.
Further impact on your housing loan (including monthly instalment payments and total amount repaid at the end of your loan) will be determined by whether you choose to extend the loan tenure, should you have the option to.
Not extending the Loan Tenure
Based on our scenario, the outstanding loan of $505,544 will be repaid over 19 years and 5 months, resulting in a higher monthly instalment from January 2021 onwards.
Extending the Loan Tenure
Based on our scenario, the outstanding loan of $505,544 will be repaid over 20 years. Assuming the interest rate remains the same at 1.90%, your monthly instalment is now $2,534 after re-amortisation and you are now paying $29 more each month.
Once again, you end up paying more by extending your loan tenure.
*Note: There will be no change to the lock-in period for DBS, OCBC, UOB and Maybank.
**Note: In the case of DBS, the monthly instalment after the deferred payment will be used to repay the accrued interest first before it is normalised to the usual full monthly instalment consisting of the principal amount and interest.
How to Apply For Mortgage Payment Deferment
Forms can be submitted online for the respective banks, including DBS Home Loan Payment Relief, OCBC Mortgage Payment Deferment Scheme, UOB Property Loan Payment Relief Programme, and Maybank Home Loan Repayment Relief. More information on how to defer your loan payments depending on your bank can be found here.
Making a Decision
So what now? Is deferring your mortgage loan right for you?
In a nutshell, while deferring your mortgage payments may ease your financial burden for now, do take note that you will eventually end up paying more overall. As such, you should only defer your housing loan payments if you have or expect to have cash flow problems in the next few months and require this financial relief.
If you do not need to defer your housing loan, what you can do, if eligible, is choose to refinance or reprice your current housing loan. This way, you will be able to earn great savings both in the short-run and long-run.
Whether it is to defer your housing loan or to refinance your housing loan, our mortgage experts at KeyQuest Mortgage will be able to provide you with professional advice depending on your financial situation, preferences and goals. Best thing of all? You can get all this for free! Contact us for a no-obligation consultation now to see how you can make the best of your mortgage loan during this difficult period.