Should I defer my home loan? Here’s the math

Thanks to the Monetary Authority of Singapore (MAS), all banks and finance companies will now allow homeowners to defer their home loan up till 31st December 2020 to help Singaporeans tide through the Covid-19 crisis and recession. That means you don’t need to pay for the whole deferment period right? Uh, not quite; you still pay for it, and in fact you’ll pay more in the long run. That said, the deferment can still help your cash-flow situation, and the overall cost is pretty low.

Important: We are not referring to all home loan deferment schemes in this article

We’ve to stress that this article refers specifically to the recent initiative by MAS that offers deferments on monthly mortgage repayments for homeowners with outstanding bank/finance company home loans.

If you have a home loan deferment scheme that was made separate to this (e.g. debt restructuring packages), then the following may not apply to you. You’ll have to check with your lender for the specifics of your arrangement.

The two ways to defer your home loan

There are two options you can choose from, when deferring the loan. The first is to pay only the interest only, while the second is to defer the entire home loan. Both methods will result in ultimately paying more for your property. However. the cost is considered small, given the benefits to your cash-flow.

Method 1: Pay only the interest

Your home loan repayment consists of two parts: a principal repayment (this pays down the original amount that you borrowed), and an interest portion (this is purely the interest charged by the bank).

To give you an example of how this works, let’s consider an outstanding home loan of $1.125 million, at 2% interest per annum; say you have another 25 years to go on the loan tenure. The monthly repayment would be around $4,770.

[Check out our mortgage calculator to work out your monthly repayments – we also break down the principal and interest portion of monthly repayments for you.]

Of this $4,770, around $2,900 goes toward paying down your principal, while $1,875 (about 39% in this case) is just interest.

With this method of home loan deferment, you would only pay the interest portion; that means your home loan repayment is $1,875 per month.

So if you were to defer for the full nine months, you would pay $16,875 ($1,875 x 9 = $16,875). Remember, however, that your principal is still untouched. That means that at the end of the nine months, the amount that you owe is still $1.125 million.

As such, you would have paid $16,875 extra by the end of the entire loan, if you were to make interest-only payments.

Method 2: Defer your entire home loan repayment

If you’re in a dire emergency, you can defer everything and not pay a cent, between April to 31st December 2020. During this time, interest will only accrue on your principal, and not on the interest.

To simplify, let’s go back to the above example, where you’d have to pay $16,875 extra in interest. Using this method, the $16,875 is ultimately added to the total amount that you owe, and you’d make monthly repayments based on that total at the end of the deferment.

In other words, your outstanding home loan would go from $1.125 million, to $1.141 million, once you resume repayments. After the deferment period, this will ramp up your monthly repayments to around $4,900 per month (this amount will stretch to the end of your loan tenure).

For both methods, your loan tenure will be extended. So, if you also have mortgage insurance, we’d advise you to apply for mortgage insurance deferment so you’ll be covered until the end of your revised loan tenure.

But note that the numbers can’t be exact, because the interest rate on your home loan fluctuates.

The interest rate peg for your home loan doesn’t change when you apply for deferment. So if you have a SIBOR-rate loan, then the interest that applies is the usual SIBOR rate plus the bank’s spread. If you have a fixed rate loan, then what applies is the usual fixed rate.

For most homeowners, the interest rate for a home loan will fluctuate (if they use a one-month SIBOR loan, for example). As such, you can only estimate the exact amount of extra interest you’re paying. Given that SIBOR rates are going down sharply, however, it’s likely to be very low over the course of 2020, or for however long the virus outbreak lasts.

Is it worth deferring your home loan?

The short answer: That depends on your cash or CPF reserves

If you use your CPF to pay the home loan, please take a moment to check the balance in your CPF Ordinary Account (CPF-OA). This is especially true if you’ve been retrenched, have lower income etc.

If you have insufficient CPF-OA reserves to cover the mortgage for at least six months, then it may be a good idea to opt for one of the deferment schemes. Paying a bit more interest, further down the road, is a lot less risky than ending up unable to service the mortgage.

If you service your home loan in cash, then the decision should be based on your cash-flow and current savings. Nine months without paying the home loan can make a big difference, and really help you build up any emergency funds that you already have.

Finally, the cost of adding nine months’ interest is not huge, given the benefits. Even if you’re not immediately facing retrenchment, business closure, etc., you may want to consider it as a way to buffer your savings for the storm ahead. If you’re in higher risk situations than the average homeowner—such as being self-employed or having a lot of dependents—then this is something to think about.

We’re only just got through the first three months of what’s shaping up to be a prolonged pandemic, with severe economic repercussions, so homeowners may need to use all the help they can get.

Are you intending to apply for home loan deferment? Voice your thoughts in our comments section or on our Facebook community page.

If you found this article helpful, 99.co recommends Covid-19 Circuit Breaker and New Bill: Details Singaporeans should know and Can I move house during the Covid-19 circuit breaker period?

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