What Happens When You Miss A Home Loan Payment?
Bank Negara Malaysia revealed last year that outstanding housing loans extended by financial institutions continued to grow 10.1% year-on-year and totalled RM460.2 billion. About 75% of borrowers (about 1.5 million) with housing loans are first time homebuyers.
Getting a foothold on the property ladder is tough. According to the central bank, access to financing was not the main problem confronting potential buyers of affordable housing – the fundamental problems were affordability and the shortage of supply of reasonably priced houses.
First-time homebuyers are then met not only with the challenges of coughing up a down payment but also miscellaneous costs that they have to pay upfront. Give or take, that’s about 20% of the cost of their home in cash terms.
After clearing that, they’ll have to deal with monthly loan payments and other costs that come with maintaining a home, from sinking fees to annual quit rent charges. No one said owning a home was easy (or cheap).
However, being human, there are days where even the most religious payer might miss out on his or her monthly payment. In those instances, what happens?
Enter, late payment charges
So, let’s say Tan purchased a home at RM600,000 with 90% financing.
|Loan tenure:||30 years|
|Interest rate:||4.65% (3.9% [Base Rate] + 0.75% [Interest Rate])|
But while in his first year, Tan forgot to pay his monthly payment on time and was found to be 30 days late. He was notified by the bank and charged arrears.
Here is how much he has to pay:
RM2,784.44 (monthly payment) x 30/365 x late interest (3.9%[Base Rate]+6.35% [Penalty Interest]) = RM23.48
Note: The penalty interest rate is set by the bank and differs from one bank to another. So if Tan is late for the month of October, he is advised to clear the arrears when he makes his November payment, which would now be RM2,807.92.
What if he doesn’t clear the arrears of RM23.48 in November? Then it would balloon till it reaches 60 days. So, in December, he would need to pay RM46.96 in arrears, and a total of RM2,831.4.
The good news is this is a one-off penalty; the bad news is if he fails to regularise the arrears by the end of the 60 days, the bank reserves the right to revise the interest rate accordingly.
Also, if he promptly pays the arrears but then down the line, he is late on his payments again, the bank will also revise the interest rate to a higher one.
What if a homeowner’s interest rate is revised? What then? Well, if he is prompt with his payment, then it may be reviewed back to the original interest rate, provided he keeps it up for anywhere between six to 12 months. However, it may not go back to the original interest rate.
One homeowner relayed his experience with iMoney on having his interest rates reviewed because he missed the payment deadline due to being overseas. He said he saw his monthly loan balloon from RM1,100 to RM1,800 a month.
It took him about a year of prompt payment to get his interest rates revised but he said he never got back the original rates, and instead had to settle for RM1,400 a month.
Let’s go back to Tan to see the difference if his interest rates are revised in his second year of payment. One convention is Base Rate + 2.85%. As the Base Rate is fixed, the interest rate varies from bank to bank. The one presented here is just a rough estimate.
So here’s the difference:
|Interest rate:||BR + 0.75% = 4.65%||BR + 2.85% = 6.75%|
|Overall total for the second year (principle + interest):||RM33,413.28||RM42,029.16|
|Total interest incurred in the second year:||RM22,468.15||RM32,868.27|
So in just one year, Tan pays an additional RM10,400.12 in interest, just by having his rates revised to 6.75%!
Why should you never miss a payment?
It hurts to be a bad payer as being habitually late on your bill payments can affect your credit health.
So, yes, even those arrears you had to pay will be reflected in your credit report, and there is no quick fix to this.
If you have been missing deadlines, your best bet is to simply make prompt payments. Your credit score won’t be affected immediately, as the report reflects your activities and transactions for the past 12 months. But pay on time and your credit score will improve in the long run.
If they take a housing loan, whether they have to eat one meal a day or whatnot for the rest of their lives, they will have to ensure they pay it off. If they can’t, be prepared for the firing squad.
The bigger picture is of course defaulting on your loan. To regularise your loan you will have to prove yourself for 12 months. In Tan’s case, he would have to promptly pay an additional RM717.99 or RM3,502.43 a month for about a year, if he is ever going to see his rates return to somewhere close to the original.
This means, for his momentary lapse of judgement for being late in his mortgage payment, he has to pay at least RM10,400 in additional interest.
If he struggles, then it would lead to more penalties, accrued interests and ultimately defaulting on his loan. That would lead to foreclosure… which is just nightmarish.
What if you are struggling to make payment…
If you are not financially drowning and the reason you are missing payment is primarily due to, say, a hectic lifestyle, then tap into technology.
You could either set reminders on your phone or even use the standing instructions on your bank account to automatically transfer money every month to service your loan.
But if you have serious debt problems, you need professional help. According to the Insolvency Department’s records, close to 22,600 Malaysians, those below age 35, have become bankrupts between 2012 and September 2016.
Among the reasons cited for bankruptcy cases were their inability to settle loans for cars, followed by personal and housing loans.
One way to deal with this is to turn to the Credit Counselling and Debt Management Agency (AKPK) and enrol in its debt management programme.
According to AKPK, close to 11,700 of its clients have completed its programme as of October 2016, after paying off debts worth RM476.6 million.
Another option is to contact the bank as soon as possible and have the terms renegotiated.
According to Robert Foo, managing director of MyFP Services Sdn Bhd, this is possible as it is not advantageous to the lender to go for legal foreclosure.
“They would prefer to restructure the loan with you if that can be done,” he was quoted as saying by The Star.
“Don’t try to hang on to a house. There is no shame in losing it,” property consultant Ernest Cheong told iMoney.
“By selling their home, they could use the money to pay down the loan. They might also consider downgrading their expectations by moving into a rented unit.
“If they take a housing loan, whether they have to eat one meal a day or whatnot for the rest of their lives, they will have to ensure they pay it off. If they can’t, be prepared for the firing squad,” he added, warning first-time homebuyers to seriously think through their finances before committing to a home loan.
It goes without saying that buying a home is perhaps one of the more important life decisions one will make. It’s a hefty one and it demands your fullest attention.
It can’t be denied that a home affords many benefits such as a roof above your head and capital appreciation.
But remember, as long as you are paying the loan, your home is technically not yours – it belongs to the bank. So be wise and commit responsibly.