On 31 March, the Monetary Authority of Singapore (MAS) announced a series of special relief measures to help individuals cope with their existing debt obligations and insurance commitments.
These measures cover 1) home mortgage repayments; 2) repayments on unsecured personal credit; 3) deferred premium payments for health and life insurance; and 4) flexible instalment plans for general insurance.
These relief measures come at a critical period where many Singaporeans are affected financially. Some may have seen their income reduce; others may be on unpaid leaves or even found themselves retrenched. For these affected people, being able to defer payments on debt obligations and insurance commitment is invaluable, even if it’s just for a short period.
But for those of us who are fortunate enough that COVID-19 has not impacted us financially (yet), should we still consider deferring payments if we are able to afford it?
Eligibility For Deferred Payment Schemes
Before thinking about whether or not you should opt to defer your debt obligations and insurance commitments, we first need to know if we qualify to do so.
According to MAS:
Home Mortgage Repayments: Borrowers do not need to show any impact from COVID-19 as long they do not have mortgage repayment which are more than 90 days past due as of 6 April 2020.
Repayment On Unsecured Personal Credit: This refers to credit card debts and credit lines. Borrowers who are impacted by COVID-19 (at least 25% income loss) can convert their debt into a term loan for a tenure of up to 5 years. Interest rates for this term loan is capped at 8% p.a.
Deferred Premium Payment For Health & Life Insurance: Policyholders who are facing financial difficulties can apply to defer their insurance premiums for 6 months.
Flexible Instalment Plans For General Insurance: Policyholder facing financial difficulties can apply to pay their insurance premiums via an instalment plan.
If you currently have financial challenges (e.g. out of a job), it makes sense to apply for deferments for your insurance premiums, and/or to convert your high-interest credit card that you are unable to repay to a lower-interest term loan.
However, for this article, we are going to assume that you have no cash flow problems and have not been affected financially by COVID-19.
As such, the only scheme that you will qualify for would be the deferment of mortgage payments for your residential property loan.
Advantages To Deferring Your Mortgage Loan Repayment
While many of us would not consider a deferment of mortgage repayment if we are not affected financially, there are some advantages to deferring your loan repayments during this period even if you can afford to continue paying.
Build Up Your Emergency Savings
If you don’t already have an emergency savings of at least six months of your average monthly expenses, it’s time to start building up.
The COVID-19 global pandemic has shown many people, both in Singapore and around the world, just how financially fragile many of us are. While we work hard each day for our families, many of us don’t have a financial safety net to fall back on if we lose our job or suffer a reduction in income that is beyond our control, even if it’s just for a few months.
For example, many private-hire drivers who were previously able to earn a few thousand dollars each month are now seeing their monthly income dropped drastically. Those who rely on part-time jobs now find themselves being unable to earn a living for themselves.
During this period, having emergency savings is critical. Even if you are not affected financially (yet), there is a possibility that the situation may worsen, and that those of us who are doing okay now may find ourselves without a job in the future.
Building up our emergency savings is essential during this period. By deferring your mortgage repayment till the end of the year, you give yourself more free cash flow each month, which would hopefully be set aside for a rainy day.
Give Your Investment Properties Some Buffer
Many Singaporeans own investment properties. Contrary to popular thinking, not all Singaporeans who own investment properties are rich. These groups may include older Singaporeans who are no longer working, and who are reliant on their investment properties for rental income and to meet mortgage repayments.
During this period, the rental market is weak. With people losing their jobs and the economy likely to go through a prolonged period of contraction, tenants of residential properties may find themselves with a smaller budget. This would put downward pressure on rent in the short to mid-term.
In a worst-case scenario, you may find that your tenant may break his/her lease if they are no longer employed. A rental deposit of one month is not going to be enough to cushion your loss of income during this period. Finding a replacement tenant will be exceptionally difficult during a time where people are largely staying at home, and movement within the country is restricted.
Even if this doesn’t happen, your tenant is likely to negotiate for a lower rent during his/her lease renewal. Doing so would be smart, because it will be difficult for you to find a new tenant, and easy for him/her to find a place willing to offer a lower rent.
What this means is that you should expect your future rental income to be lower. For example, if your mortgage repayment is $2,000 a month, and you are currently renting your property for $2,000 a month, you may think you are still doing fine. However, if your tenant were to renew the lease at a lower rental rate of $1,700, this means you will need to cough up an extra $300 each month in the future.
As such, it would be prudent for you to build up some cash buffer first with the expectation that your future rental income may be lower. At the very least, doing so allows you to continue collecting rental income till the end of the year without needing to pay for your mortgage repayment.
Do note that your credit bureau report will not be impacted in any way if you choose to defer your mortgage repayment.
Disadvantages Of Deferring Your Mortgage Loan Repayments
It’s important to remember that deferring your mortgage repayment means you will be paying more each month when repayment subsequently resumes. The bank will re-amortise the principal repayment amount deferred over the remaining loan period and your monthly repayment amount is likely to be higher.
Deferment With No Tenure Extension
Option 1: Deferment Of Principal & Interest (DPI) – Your entire monthly mortgage repayment (principal & interest) will be deferred until 31 December 2020. During this period, you do not need to service your monthly instalment.
Option 2: Deferment of Principal (DP) – Your mortgage consists of two components, principal & interest. For this option, you will defer your principal repayment but continue paying the interest each month. Essentially, what this means is that you will be paying a lower monthly mortgage repayment until 31 December 2020.
You can choose as well whether or not you wish to extend your loan tenure. For example, if you are deferring for six months on a loan which is 20 years, extending the loan tenure will mean that your loan period increases to 20 years and six months.
MAS gives an example of such a scenario.
For a mortgage with an outstanding loan of $200,000 and a remaining tenure of 20 years, and assuming an interest rate of 2%, the extra interest cost over the remaining tenure will be about
– $1,300 for a principal-only deferment for 9 months, and $2,930 if the tenure is also extended by 9 months.
– $1,920 for a principal-only deferment for 9 months, and $3,570 if the tenure is also extended by 9 months.
Basically, in return for the short-term cashflow benefits that you get through deferring your payments, you will likely end up paying more overall in interest cost.
If you intend to consider a mortgage repayment deferment, it’s highly advisable that you find out from your bank how your future mortgage payment schedule would look like. If you are not comfortable or find no need to defer repayment, you can still choose not to do anything and avoid incurring any unnecessary interest cost.
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