Home loan deferment can rescue you

Thanks to the Monetary Authority of Singapore (MAS), there is now a uniform approach to home loan deferments amongst banks. Previously, every bank had slightly different requirements, such as requiring you to be in a certain industry, and different ways of pricing the deferment (it is not free!)

Now that things are more standardised, it’s high time to consider if a home loan deferment is the right step for you. Here are some of the key things to understand before you apply:

First, what is a home loan deferment and how does it work?

A home loan deferment allows you to temporarily suspend all or partial amounts of your monthly home loan repayment. At present, you can choose to do this until 31st December 2020. All you need to do is apply at your bank.

(There is no need to show any proof that you’re affected by Covid-19. The only requirement is that you cannot have any missed home loan repayments, that are more than 90 days overdue).

You can defer your home loan in two ways:

First, you can choose to pay only the interest on your home loan, without paying down your principal.

Man hugging money bag

For example, say your monthly home loan repayment is $2,800. Of this amount, $1,600 goes toward paying down your principal, whereas the remaining $1,200 goes toward paying your interest.

(To find out how much of your loan repayment goes to the interest or principal, you can use a mortgage calculator).

If you choose to defer by paying the interest, you would thus only pay $1,200 per month, for the entire deferment period.

Note that you are ultimately paying extra interest, as your principal is not being paid down e.g. if your outstanding home loan is $1 million, and you pay $1,200 for the next nine months, you will still owe $1 million at the end of the nine months.

However, this may be a small amount compared to the advantages it can provide, as I’ll describe later.

Second, you can choose to defer the entire monthly repayment

If you use this method, the interest will only accrue on your principal amount. Here’s how it works:

Say you are supposed to repay $2,800 per month, of which $1,600 is the principal and $1,200 is the interest (as in the first example). You choose to defer the loan for three months, accumulating $3,600 in interest.

Later, when you resume repayment of the loan, the $3,600 will be added to the total you owe, and your repayments recalculated accordingly e.g. if you have $800,000 outstanding when you resume repayments, then your loan is calculated as if you owe $803,600 from that point.

This will slightly raise the monthly repayments until the end of the loan tenure, once you resume repayment.

Note that both options will incur additional costs on the overall price of your home; you are paying more interest in return for the deferment.

When should you consider applying for a home loan deferment?

Thinking about deferment

It is actually quite a good deal that MAS has worked out for us, even though we’re paying a bit more interest. There are three circumstances in which you should consider this deferment:

  • You’re experiencing difficulties repaying your home loan right now
  • You want a safety buffer in an uncertain future
  • You service the loan in cash, and need more liquidity

1. You’re experiencing difficulties repaying your home loan right now

I don’t think I need to explain this much, as it’s quite obvious. The entire point of the deferment scheme is to help those who can no longer service their loan.

If you’re in this situation, please don’t wait – apply for the deferment now, and not when you are a few days away from the next repayment.

In almost every situation it’s better to get the deferment, than to be forced to sell your property on short notice. There’s a big difference in having to sell off your house next month, versus having until December to right-size your home (i.e. sell it and move to a more affordable unit).

Do contact me if you’re in such a situation: I can help you get the best possible deal for the sale of your home.

2. You want a safety buffer in an uncertain future

Even if your finances aren’t tight right now, you may be able to foresee some issues ahead. If you run your own business, or your employer is on rocky ground, then it’s best to be well prepared.

One method is to apply for a home loan deferment, and save up the money. Simply put: if you don’t pay the home loan for nine months, and save up the money, then you’re able to service the loan for around nine more months if you lose your income (you can rely on the savings you’ve accumulated).

You will pay a bit more interest for this, but it’s a vital safety buffer if you get retrenched, you have to close your business, etc.

I feel this is not necessary if you already have a significant emergency fund (i.e. you have enough saved up to pay the mortgage for at least six months, even if you lose your income).

If you don’t have such emergency savings however, or if the savings are already being tapped, then loan deferment can be a prudent pre-emptive step.

3. You service the loan in cash, and need more liquidity

Some of you service the home loan in cash and not with your CPF, so paying less literally means having more cash in hand.

A deferment can be useful as a safety measure. For example, if your cash-in-hand is limited (your savings are thin), it may be better for you to start setting aside cash for emergencies, rather than live paycheque to paycheque right now. This can be a priority move, if you can foresee that your employer or business is facing difficulty (having emergency savings means you don’t need to use high interest debt, such as personal loans, to deal with a crisis).

Do speak to a financial planner – a deferment can be a good way to increase liquidity and savings, and brace you for coming difficulties.

Overall, I’d suggest you don’t hesitate too much to apply for a deferment, if you need the extra safety

More interest does eat into your capital gains; but this cost is trivial compared to facing foreclosure. If you are in a financially secure position however, it’s best to avoid deferments, as you’d ultimately pay more for your home than you have to.

You can also feel free to message me or follow me on Facebook for advice, regarding any of your home ownership questions.

Ron Chong is a leading property agent with Orange Tee & Tie, and had a previous background in construction and Interior Design. His background gives him a wider breadth of experience in dealing with Singapore properties, and he aims to provide practical, actionable advice to buyers and sellers today. Like him on Facebook for the latest news and updates.

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