What Can You Expect After The Loan Moratorium Is Over?
There has been a lot of talk in the last two weeks about the loan moratorium. Obviously if you are short of money right now, the only option you have is to take what your bank is offering.
We have also published the list of loan payments that are included in the 6-month moratorium offered by Bank Negara and explained how it works.
As the moratorium is automatic and took effect on April 1, if you did nothing, that means you have already opted to defer your loan. But if you are fortunate enough to keep your income in these trying times, there are other factors you should keep in mind.
Either way, you should know what is in store for you once the moratorium is over.
What are the risks of taking the loan moratorium or opting out?
While banks may have different ways to manage the repayment terms after the moratorium, remember to consider your options carefully by calculating the cost of the loan deferment.
Below we have laid out the most common repayment options on the table if you have taken out a RM500,000 home loan for 30 years. Assuming you have been paying the loan for 20 months, here’s how the accrued interest for the 6-month moratorium will work out depending on how your loan payments resume after September 2020.
|Original home loan package|
|Total loan amount||RM500,000|
|Loan period (years)||30|
|Number of payments made (months)||20|
|Initial interest rate||4.6%|
|Length of moratorium (months)||6|
|Amount of monthly payment before moratorium||RM2,563.22|
|Number of months remaining if you opt-out||340|
|Extra interest accumulated if you opt-in the moratorium||RM11,191.50|
Options available on how to pay the accumulated interest of RM11.191.50 after the moratorium.
|Opt-out of loan moratorium and continue monthly loan repayments as original schedule|
|Original monthly loan repayment amount||RM2,563.22|
|Original number of months to finish paying loan||340|
|Original loan end date||16/08/2048|
|Total paid for 340 months||RM871,494.80|
|Keep to original repayment period plus 6 months but increase the monthly loan repayment amount to cover the extra interest charges|
|New monthly repayment amount||2,622.18|
|Monthly repayment amount increased by||2.30%|
|Number of months to finish paying loan||346|
|New loan end date||16/02/2049|
|Total paid for 346 months||RM907,274.28|
|Keep same amount of monthly loan repayment as before moratorium but extend repayment period|
|Keep original monthly loan repayment amount||RM2,563.22|
|Additional number of months needed to pay the accrued interest charges||17|
|Total amount paid for the additional months||RM45.574.74|
|Number of months to finish paying loan||363|
|New loan end date||16/06/2050|
|Total paid for 363 months||RM930,448.86|
Note: This is mainly for home loans only. Most hire purchase and personal loans work on flat interest rates so there is no additional interest charged if you take the moratorium.
While it is also possible to pay off the accrued interest as a lump sum payment after the moratorium, in reality most wage-earners will not be in the position to pay off RM10,000 to RM40,000 in one payment or even spread over 1 year on top of their regular loan repayments.
It is also important to remember that under normal circumstances, if you stop paying your loans, it will have a negative effect on your credit rating. But not during this moratorium.
While the current loan moratorium will not impact your credit rating, why not take this opportunity to learn more about taking care of your credit health so that you are in position to take advantage of more credit products when the economy improves.
Keep in mind that taking the loan moratorium does not impact your credit score now, but other parts of your life may be impacted especially if like most people, you end up extending your loan repayment terms after the moratorium has ended.
What is the real financial impact of extending your repayment terms?
- Eat into your immediate financial plans
Before the Covid-19 pandemic took hold, were you planning on a big-ticket purchase like a vehicle or household appliance? Or to pay for your child going to university by next year?
Adding a minimum of 6 months to your loan repayment term may set you back several years in reaching your next financial target.
Or if you choose to increase your monthly loan repayment after the moratorium to cover the additional interest charges, that means an extra amount taken from your monthly budget for another 6 months which could have been put aside for your other financial plans.
Delaying any immediate financial plan could have a domino effect on your other plans lined up along the way.
- Make your long-term financial goals even harder to reach
If you choose to keep the same loan repayment amount after the moratorium, this means extending the length of time needed to finish paying the loan.
It could mean adding another 2 years to your loan repayment term and paying a lot more in interest charges than what you signed up for.
Stretching out the loan payment time means keeping a higher debt to income ratio for a longer period too. This might mean you will not be able to take on any more credit products you might need down the road to expand your business or invest in your retirement plans.
- You can do more with the same amount
There could also be better ways to use the amount you have committed to pay in compounded interest by extending your loan repayment period.
Based on the table above, if you have opted out of the loan moratorium, you will save between RM35,779.32 to RM58,954.06 in additional interest charges.
That additional amount of money can be used to put a down payment on another asset, invest or even put aside in a fixed deposit account as an emergency fund.
Clearly the time value of the same amount of money can be greater if it is not locked into your home loan.
At every juncture, you need to calculate how much risk you can afford and can you commit to the time and discipline needed to realise the investment by taking that route.
What can we learn from this loan moratorium?
Clearly, we always need to keep on top of our finances and credit health to be prepared for financial emergencies like this.
During times like these, your credit health monitoring is even more important. According to CyberSecurity Malaysia, cybersecurity incidents increased by over 82.5% during the MCO compared to the same period last year. This includes cases of frauds that involve scams and phishing.
This means we are all at greater risk of cybercrime as we share more and more of our personal and business transactions online daily. But you can take immediate steps now to protect your financial health too.
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- Alerts you on changes in credit profile
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Taking charge of our finances better also involves protecting ourselves online against cybercrimes that can rob us of not only our money but also financial reputation.
Read More: Calculate Your Options For The Hire Purchase Loan Moratorium