29 March 2020

[Deferment of Loan] With or without compound? Interest-free? House vs Car loan?

Yup. We know that this topic is not easy to understand, yet it shouldn't be difficult to know. Why? Because it's all about our money matters. That's why we rather take some time to write about this, instead of giving you readers a quick conclusion.

We still have a few days to decide to opt-in or opt-out from the offer given by respective banks on the deferment of loan/financing.

How is it works actually?
Click here to read our previous article on the measures announced...

Now, let's jump to the advance part which most of us are concerned about.

Here you go...

Q1) Should we Opt-out from the measure of deferment?

It depends on what kind of loan are you having now.

Basically, we can categorize as variable-rate & fixed-rate loans. For fixed-rate loans such as car loans, you don't have to do anything, just take the offer to defer the repayment for 6 months. The only effect is your loan tenure will extend by 6 months accordingly. No additional interest/profit charged during deferment. As simple as that.

However, for variable-rate loans such as housing loans, you gonna refer to the below questions. If your housing loan is on a flat-interest rate type, then you can end your reading here.


(From here onwards, it's all about variable-rate housing loans...)

Q2) Deferment of repayment means interest-free?
The answer is NO. As stated in the BNM statement (see picture below).

Q3) Compound vs Non-Compound of interest during the deferment periodYup. Although interest will continue to be charged on 
the outstanding balance comprising of both principal and interest portion (i.e. compounded) during the deferment period. However, some banks may decide NOT to compound the interest during the deferment period.

With this, we did a table of summary of calculation on the effect:

Click to enlarge

The picture above is too small for you to see and read?
No worry. Click here to download the PDF file.

The above illustration of a conventional housing loan is based on these assumptions:
  • Initial Loan amount - RM300,000
  • Interest rate - 4.6% p.a. (throughout the whole loan tenure)
  • Original tenure - 35 years, and borrower has repaid for 5 years


According to financial planner Alex Yeoh, loan borrowers should carefully consider the payment options proposed by banks. Most likely, two options will be given by banks:
  1. Higher repayment amount after the 6 months moratorium period; or
  2. Maintain the same amount of repayment by extending the loan tenure.

For option 2, the loan tenure would be more than 6 months being extended. For housing loans with fluctuate interest rates, it is different from our car loan, in terms of calculation. Please be mindful. As shown in the example above, the loan tenure will be extended by 25 months!!!

Anyway, during these difficult times, we should prioritize according to the below items for example:
  1. Do you have money to pay for essential items for the next 6 months (at least), if without any income? Survive first...
  2. Cut down on credit card debts, if any
  3. Create an emergency fund / Save for rainy days (if you haven't done so)
If you haven't done the above 3 items, please accept the offer to defer your housing loans. You need the money!

Next, what would you do with the money if you have enough money and still choose to defer the repayments?

Alex Yeoh said this is the most important question to ask yourself if you already pass through the above 3 questions. Many people would think about investing the money. It's your choice, but he reminded all 'investors' that market volatility may persist for months and no one can be guaranteed of making a profit be it 6 months or 12 months down the road.

In the event that investment turns sour, would you be able to service the loans after the 6 months of honeymoon period barring any unforeseen circumstances such as unemployment or business failure?

Follow Alex Yeoh via Facebook @AlexYeohMalaysia
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