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In the NewsMORATORIUM? WHAT’S THE CATCH?
By Gavin Liew | 6 Apr 2020



MORATORIUM? WHAT’S THE CATCH? 


Hey guys! We’ve received many queries lately regarding the uncertainties on the moratorium, mainly due to the fact that interests are still chargeable. For hire purchase loans and personal loans, due to the flat-interest-rate nature of these loans, this 6-month deferment will not incur any additional charges. 


For housing loans, things get a little tricky due to having interests charged based on reducing balances. The impact and compounding effect of this 6 months moratorium can be SUBSTANTIAL, or NEGLIGIBLE, depending on how we pay it back. 


Generally, banks have 3 options to repay this deferred amount (there could be other options bank to bank, so best to check with your bank)


1. Pay the accrued interest in one lump sum

2. Pay the same monthly instalments, and extend your tenure

3. Pay slightly higher instalments, and maintain your current loan tenure


Let’s take a look at the impact of these 3 options. 



1. Pay the accrued interest in one lump sum

This option will be the one that incurs the least amount of additional interests, but it is also the option that kind of defeats the purpose. 

Assuming your monthly instalment is, let’s say, RM2000. A huge portion of this monthly instalment goes to your interest, depending on how long you have had this loan. Typically, for the first 10 years of your housing loan (based on a 35-year loan), the interest portion of your monthly instalment is between 70%-80%.

Because many banks have already stated their stand saying there will not be compounded interests during this 6-month moratorium, there will be minimal impact and taking this option means you will repay back every month’s interest portion in one lump sum in October 2020.

The whole purpose of taking this loan moratorium will be to ease up your cash flow for other priorities in life, so this option doesn’t really help much. 


TL;DR: Don’t take this option. It doesn’t help with cash flow much. 



2. Pay the same monthly instalments, and extend your tenure

For this option, you basically pay the same monthly instalment as before, but you extend the entire tenure of your housing loan, in order to pay back the interests incurred during this 6 months. 

Now, this is where things get really scary. Due to the nature of housing loans, where interests are charged based on your loan balances stretched over the number of years you have left, this option can result in an extended tenure by a crazy 20++ months! 

In a nutshell, the compounding effect of your interests incurred, coupled with not reducing your loan principals for the duration of this 6 months, multiplied by the number of years left to repay your loan, has an insane multiplier effect on your tenure. 


TL;DR: Do not opt for this. If you maintain your same instalment, it can take you an additional 20+ months to repay the interests accrued during this 6 months. 



3. Pay slightly higher instalments, and maintain your current loan tenure

Now, what happens if you opt to pay a higher instalment to cover for the interests accrued during this 6 months period? 

The same insane multiplier effect of housing loan interests work here too, but to your advantage. You probably have to pay an additional 2-3% on top of your current monthly instalments to repay the interest accrued. 

So for example, if your monthly instalments are RM2000, the new revised monthly instalments will probably be RM2,060, an additional RM60 a month for the remaining years left in your loan. 



TL;DR: Best option. You only need to increase your monthly instalments by 2-3%, in exchange for 6 months of additional cash reserves. 



CONCLUSION

I personally feel it’s best to take the moratorium. Based on the examples above, having an additional RM12,000 during these strange times will definitely be beneficial, be it for rainy days or even to park in your war chest for when investment opportunities arise. 

When October comes, just opt for option 3. An additional RM60 a month is a small price to pay for having additional funds for emergencies and opportunities. 

Moreover, there is a huge possibility of another OPR rate cut this year, and when BNM does that, it will nullify the impact of the increased instalment. 


TL;DR: Cash is king. Unless you already have plenty. But then again, is there such a thing as too much cash in hand in times like these?  



ENDING NOTES

I’m really sorry it took us so long to respond to the current situation. Being SMEs ourselves, we were badly hit by this MCO, and we have been spending a lot of time trying to stabilize ourselves, and speaking with other SMEs to see how we can best support each other in these trying times. Malaysian SMEs really need to stand together, and moving forward we will double our efforts to create more win-win-win collaborations with local brands for the benefit of everyone. Our mantra is there must be 3 wins for a successful collaboration or campaign, our customers must win first, and both collaborating brands must also win. If you’ve got an idea on how we can create better value together, please do get in touch with us. #kitajagakita


Thank you for reading this far, and please please please stay safe everyone! 


With much gratitude,

Gavin

Founder


Gavin Liew
Founder

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