What is the 6-Month Moratorium and Should I Take It?

The 6 months moratorium is useful if you are applying it to hire purchase loans with flat interest rates. This will free up spare cash required for daily necessities to survive through the pandemic. However, one might need to consider other factors if you are applying it to mortgage loans as it incurs more cost to finance.

When the first round of 6 months automatic deferment of all loans was announced back in May 2020, it was met with much relief. However, fast forward 1 year into MC0 3.0 (oh yes, don’t we all love trilogies), another round of blanket loan repayment moratorium is announced. This time around, deferment is only available upon application.

For the benefit of those who do not know anything about the 6-months loan moratorium, without going into the nitty-gritty details, it is essentially a loan repayment holiday for 6 months.

Hence, the great question we all have is, “How can I benefit from the 6 months loan moratorium and how can I apply for it?”. On a personal level, I believe this is a much-needed relief for many and we should capitalize on it, with much consideration of our own situation.

Let’s explore the two main loan facilities you and I will have and how a deferment can benefit you.

1. Should I take up a 6-month moratorium for hire purchase loans, a.k.a car loans?

Most of the hire purchase loans issued work on a flat interest rate. If your loan is like mine for my simple car, an interest rate is agreed upon upfront and is charged on a fixed amount throughout the tenure, giving you an expected final sum upon completing the loan tenure.

In such cases, you stand to benefit from the 6-month loan deferment. Seeing that interest is not charged for hire purchase agreements for both conventional and Shariah variants, there is little to no reason to complete the loan as soon as possible. All this is possible because there are no further changes to our agreements with the bank with the exception of an additional 6 months extension to the tenure. Effectively, it is a repayment holiday for 6 months. YAY!

In other words, there will be additional cash flow for survival with no catch to it! Assuming every month you were required to choke up RM 500 to the bank, now you get a payment holiday for 6 months, a whooping RM 3,000! That is a whole months’ worth of salary that can stretch well for survival.

Now if you have a loan that does not work on a flat interest rate, ie reducing balance interest charge, don’t worry because it is very much similar to the deferment structure for mortgage loans.

2. Should I take up a 6-month moratorium for mortgage loans, a.k.a home loans?

Now, this is my favourite topic. As per the usual, let’s deep dive and really understand how this deferment works!

Home loans are typically where things become interesting because of how interest is charged on a reducing balance basis. In other words, interest is charged every month based on the total outstanding (Capital outstanding = capital borrowed – capital paid) from the previous month. To add on top of that, while Bank Negara and other banks have stated that borrowers get a payment break for these 6 months, interest will still accrue due to the very nature of the loan agreement.

Now to illustrate with some of my weaker subjects, mathematics, say you have a typical home loan with an outstanding balance of RM 400,000. Considering your home loan interest is at 3.5% p.a. and a monthly instalment of RM 1,796.18, an estimated 70% of that sum will go to interest pay off for the first few years.

What it also means is, for the next 6 months, an ADDITIONAL total interest of RM 7,000 (calculated from RM 400,000 x 3.5% x 0.5 (6 months over 12 months)) will need to be paid off and your agreed tenure will be extended by 6 months. To put it even simpler, by applying for this deferment, you are paying an additional amount of RM 7,000.00 to the bank on top of what you would have already paid if you did not opt for the deferment.

Now, let’s consider how that works out for your loan calculation on 2 premises,

Case 1: Small Home Loan
Loan Outstanding: RM 400,000
Interest Rate: 3.5%
Agreed Tenure: 30 years

	Without Deferment	With Deferment
Capital Borrowed	RM 400,000.00	RM 400,000.00
Total Interest Accrued @ 3.5% p.a Over 30 Years	RM 246,624.35	RM 246,624.35
Total Additional Interest Accrued due to 6-Month Moratorium		RM 7,000.00
Total Repayment at 30 Years	RM 646,624.35	RM 653,624.35

From Case 1, having applied for the deferment, the loan will eventually set us back by RM 7,000.00 with an outstanding capital of RM 400,000 at the time of deferment. Looking at the figure, it’s about 1.75% more on the capital against a situation without deferment.

Case 2: A Substantial Sized Home Loan
Loan Outstanding: RM 1,000,000
Interest Rate: 3.5%
Agreed Tenure: 30 years

	Without Deferment	With Deferment
Capital Borrowed	RM 1,000,000.00	RM 1,000,000.00
Total Interest Accrued @ 3.5% p.a Over 30 Years	RM 616,560.88	RM 616,560.88
Total Additional Interest Accrued due to 6-Month Moratorium		RM 17,500.00
Total Repayment at 30 Years	RM 1,616,560.88	RM 1,635,420.77

From Case 2, the deferment of our home loan will set us back by RM 17,500.00, similarly a 1.75% more on capital.

Now that we understand there is a cost to the 6-month moratorium and can appreciate the true cost of a deferment for home loans, how do I know if I will benefit from this deferment? To me, I will take up the loan deferment in consideration of a few factors.

Firstly, I will consider my financial position, do I need this?

1. If I am in a difficult position financially, YES, please take it and make good use of it. When I say make good use of it, I meant to keep it aside for emergency use and daily necessities. Please do not attempt to risk it all and watch it burn like a burning castle.
2. If I am not in a difficult position financially and I have the good means to make an extra buck, YES! This is definitely an opportunity to capitalize on as the current interest rate is pretty cheap at about 3% (Mine is at 3.1%, sadly) and a lot of the other investment vehicles out there can easily beat the crap out of home loans’ interest rate.  My personal favorite, index mirroring ETFs (my personal retirement portfolio).
3. If I am not in a difficult position and am just too lazy to figure out how to invest it, NO. Just pay your house loan as per the usual. Why bother incurring more cost to the home loan if you are not going to make good use out of it?

Now, if you have multiple home loans and am considering if a deferment for these loans is of good advice, these are my recommendations,

1. With tenants staying indoors more with the lockdown, IKEA is seeing a booming business. What that means for us is that wear and tear of furniture is inevitable and having that additional cash stored up may be a good idea!
2. At the same time, there could also be situations where we might need to give “moratorium” to our tenants as well. By deferring our loan repayments, we free up cash to help out some of our struggling tenants too. Trust me, genuine struggling tenants will be very appreciative of this gesture.
   However, do practice caution as these “moratorium” given to tenants do come at our own cost.

3. How should I pay off these accrued interest?

From what I understand after speaking with bankers, there are mainly 2 ways to go about this and these are my opinions about it.

1. Pay a higher monthly repayment but keep the loan tenure the same. My personal preferred method as it helps balance out my cashflow. How it works is to pay more each month to offset the outstanding balance (both capital + original interest and moratorium accrued interest). Highly suitable for individuals like myself where I would have used those deferred repayments and placed them into a long-ish term investment such as ETFs. By the time I’m done with my loan payment, also when I’m an old man, my ETF investments would have made good decent return out of it.
2. Pay everything off in one shot at the end of deferment. This is a good option to consider if you’re in and out of a successful short-term investment in the 6 months.

4. What is the best way to apply for the 6-month loan moratorium?

All application for the 6-month loan moratorium is done through respective banks. Do know that there is a set timeframe for the application which is now open from 7 July to 31 July 2021.

5. What will I do for this 6-month loan moratorium?

Please note this is a very personal thing and I do advise you to consider things from all aspects. Personally, I have applied for the moratorium and will be pouring those fresh funds into my U.S retirement portfolio. I am well advised on the market and I believe a return of 3.5% is an easy target with the current economic weather.

To wrap it up, I wish everyone the best of safety and pray that this pandemic will be over soon. Take care.