Before we dive into greater detail about whether a loan deferment is a good or bad idea, first off, let’s briefly explain what it’s all about.
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.
Sounds like a pretty good deal, right? Well, on 25th March 2020, Bank Negara Malaysia (BNM) announced just such a thing: A 6-month automatic moratorium (read: suspension) on loan/financing repayment obligation! This would take place starting 1st April 2020.
*Editor's Note #1: The Malaysian government made a decision to reintroduce the loan moratorium plan (under the PEMULIH programme), starting 7th July 2021, and will last for a period of 6 months.
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.
*Editor's 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:
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 (April): 500,000 x (4% / 12 months) = 501,667
2nd month (May): 501,667 x (4% / 12 months) = 503,339
3rd month (June): 503,339 x (4% / 12 months) = 505,017
4th month (July): 505,017 x (4% / 12 months) = 506,700
5th month (August): 506,700 x (4% / 12 months) = 508,389
6th month (September): 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.
1st month (April): 500,000
2nd month (May): 500,000
3rd month (June): 500,000
4th month (July): 500,000
5th month (August): 500,000
6th month (September): 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 1st October. 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.
They would have to carefully consider the after-effects however, as making the decision to opt-in for this programme is almost like borrowing money at a very high interest rate (this is compared to savings; but it’s still lower than that of a personal loan).
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 1st October, 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!
If you’re still in a dilemma about whether to opt in or out of the loan deferment, check out the pros and cons below for additional clarity:
Pros of Loan Deferment
Cons of Loan Deferment
It won’t affect your credit score.
Your credit score will be affected if you're late or miss a single payment once you're back to your regular repayment schedule.
It can give you a much needed (and welcomed!) break from debt payments, and an opportunity for you to regain your financial footing or pay for emergencies/critical needs.
The accumulated interest will be more expensive in the long run.
It helps you avoid the possibility of defaulting on your loan, if ever paying it off becomes impossible.
May cause you to default on your loan in the future, if you’re unable to handle the regular repayments, due to the additional interest from the 6 months.
Has a lower interest compared to that of a personal loan.
The money saved during the 6 months can be placed in an investment fund that gives a higher return than your home loan’s interest rate.