(Update 6/5/2020 7.30pm: Finance Minister Tengku Dato’ Sri Zafrul Abdul Aziz has announced that hire purchase agreements for both conventional and Shariah-compliant variants will not accrue interest during the moratorium interest. We have updated the article below to reflect this development.)
(Update 30/4/2020 8pm: To reflect BNM and ABM’s announcement to amend the moratorium for hire purchase and fixed-rate Islamic financing, we have removed our recommendation for both types of loans. We are in the midst of analysing the way banks are calculating interest on deferred instalments, and will publish our analysis and recommendations when they are complete.)
For many Malaysians, the announcement by Bank Negara Malaysia (BNM) of the 6-month automatic deferment of all loans was met with relief. At a time when job security is non-existent in Malaysia and across the globe, the decision to offer no penalties for not paying off a substantial monthly commitment is welcome news indeed.
That said, there remains quite a bit of confusion and misunderstanding on the matter. How exactly will the deferment change the terms of our current loans? Are we still paying interest during the deferment period? How significant is the announcement that banks are waiving compounding interest during the deferment period?
In this article, we will break down all aspects of the BNM deferment, and how it will affect any loans that we may have.
Hire Purchase Agreements
Hire purchase loans work on a flat interest rate, which means the interest rate is agreed upfront, and is charged on a fixed amount (in this case, the value of the loan) throughout the tenure.
(Updated 30/4/2020, 8pm)
During the 6-month deferment period, there will be no additional interest charged. This is because the interest follows a flat rate basis, and since the principal sum does not increase, you will enjoy a true “payment holiday” with no implications from today until the end of September. Note that this explanation applies only to flat-rate car loans (which is the most popular car loan in the country). For variable rate car loans, the calculations will follow a reducing balance interest charge – please refer to the mortgage loan explanation below.
(Updated 30/4/2020, 8pm)
Now that Bank Negara Malaysia (BNM) and the Association of Banks in Malaysia (ABM) have announced that interest may now be charged to all hire purchase agreements, those currently servicing these loans should review their car loans before deciding to opt in. According to the ABM, Malaysians currently servicing hire purchase loans have two options at the end of the moratorium period: Pay the accumulated 6 months’ deferred instalments together with their October 2020 instalment without being charged any additional interest; or Continue the repayment of these instalments post-October 2020 through an extension of 6 months in repayment period after the original maturity date. In this case, interest based on the contractual rate will be charged on the amount of the deferred instalments that remains outstanding until these instalments are fully repaid, which should be by the end of the extended 6-month tenure. Option 1 is straightforward – if you have the means to service the funds, it makes sense to take the deferment and put the funds away into a safe, high-interest savings account or investment and withdraw them after six months to earn some interest with minimal work. On the other hand, Option 2 will see the introduction of interest charges during the moratorium period. The amount you pay highly depends on two factors: your monthly instalment amount, and the remaining tenure of your loan.
(Updated 6/5/2020, 7.30pm) The stunning announcement from the Finance Minister today effectively reverses the changes announced on 30 April. Interest will no longer accrue for hire purchase agreements for both conventional and Shariah variants, with no further changes to their agreements with the exception of an additional six-month extension to the tenure. With that, we can safely and easily recommend taking up this deferment again, with the following explanation from above:
During the 6-month deferment period, there will be no additional interest charged. This is because the interest follows a flat rate basis, and since the principal sum does not increase, you will enjoy a true “payment holiday” with no implications from today until the end of September.
Note that this explanation applies only to flat-rate car loans (which is the most popular car loan in the country). For variable rate car loans, the calculations will follow a reducing balance interest charge – please refer to the mortgage loan explanation below.
Just like hire purchase agreements, personal loans and personal financing follow a flat-rate basis for the interest/profit rates. This means that regardless of your outstanding balance, you will pay a fixed interest or profit rate where the total is set by you and the lender. (Updated 30/4/2020, 8pm)
Therefore, there will be no additional interest charged during the 6-month deferment period.
(Updated 30/4/2020, 8pm) BNM and ABM’s announcement today covers only hire purchase agreements as well as fixed-rate Islamic financing. There is no mention of additional interest charges for conventional loans, so for now, it is safe to say that conventional personal loans will have no additional interest charged.
For Islamic financing, the additional profit charges will be calculated the same way as hire purchase agreements.
While all banks offering personal loan or financing are covered under the BNM deferment programme, non-bank entities may still be offering their own assistance. Aeon Credit Service, for example, is offering a one-month deferment for all existing personal loans and financing, and like BNM’s initiative, it is an automatic deferment. For other lenders, please check with them if you would like to seek a deferment.
Mortgage Loans/Home Loans
Home loans or mortgages are where things can get very confusing – this is where the BNM 6-month deferment will affect Malaysians the most.
As most home loans charge interest on a reducing balance basis, interest is charged each month based on the total outstanding balance from the previous month. With the six-month deferment, BNM and all banks have stated that borrowers do not need to pay anything during this period – BUT interest will still accrue. We checked all banks’ as well as BNM’s FAQ on this, and they all confirm that interest will accrue during this period.
What about the non-compounding interest? As of 31 March 2020, all Malaysian banks as well as the HOUS foreign banks (HSBC, OCBC, UOB, and Standard Chartered) have all announced that they will not be compounding interest for the accumulated interest during the 6-month deferment period. It definitely sounds noble, but how much is this amount exactly?
To illustrate, let’s say you have just taken a conventional home loan with outstanding balance as of 31 March 2020 at RM500,000. Your home loan interest rate is 4% p.a. and monthly repayment is RM2,390.52. The table below shows how much interest that will accrue during the deferment period, both if it compounds and if it does not:
|Month||Interest charge (non-compounding)||Interest charge (compounding)|
As you can see, despite what the banks are saying, the compounding interest charges that they are all waiving isn’t actually a very big sum (from an individual perspective).
But from a macroeconomic scale, this value quickly turns into a very, very big amount for the banks. Data from the National Property Information Centre shows that between 2009 until 2018, there were over 2.3 million residential properties sold. Assuming all of these properties were sold via home loans, the value of the 6-month non-compounding interest could actually come up to hundreds of millions of Ringgit in potential revenue for the banks in Malaysia.
That being said, let’s not forget that banks are still generating revenue from the accrued interest over the six months. Depending on how you repay this accrued interest, you would still end up additionally paying a minimum of six months’ worth of interest into your home loan. Note, also, that all banks are saying that they will not compound interest “during the deferment period” – none of the FAQs say that there will be no interest compounding from October 2020 onwards.
The exception to this is of course Islamic financing plans, where profit cannot be made from profit. This carries a huge implication, because with zero compounding of profit anywhere, you’ll effectively only be paying the accrued interest (i.e. RM10,000.02 from the example above) and nothing more.
What’s the best repayment option after the deferment programme?
With six months’ worth of interest to pay, it’s how you pay it that will determine how much more you will end up paying. We found that in general, banks will offer three options of repaying this amount:
- Pay the accrued interest in one lump sum in October 2020 in addition to your usual monthly repayment. Loan tenure and repayment amount remains unchanged.
- Pay the same monthly repayment amount from October 2020 onwards, but the loan tenure will be extended to accommodate the additional interest payment.
- Pay a higher monthly repayment from October 2020 onwards to accommodate the additional interest payment, but the loan tenure will not be changed.
The banks may have other options, but these three are the most common ones offered. You should check with your bank on your available options before opting in for the deferment just in case. Let’s break down how each of the three options above will affect you and your wallet in the long term.
In the explanations below we will continue to use the example of a RM500,000 outstanding conventional home loan at 4% interest p.a.
Option 1: Pay the accrued interest in one lump sum
This is the option where you pay the least additional interest – but might be the one that’s most difficult to do. By deferring the payment for six months, you’ll free up RM2,390.52 each month to use for buying groceries and other essentials if the extra cash is needed. But remember, this isn’t free money – this is the amount you’d have to spend for your home loan.
However, you will accrue RM10,000.02 in additional interest during the deferment period. For those who will need the deferment to free up cash flow during these six months, Option 1 will definitely be a stretch – how to raise RM10,000.02 when there isn’t even enough money to pay for bills?
However, for those who have the means to pay their monthly repayments but are curious if this deferment is an opportunity to make some money, we can safely say it is possible – but it’s highly dependent on what saving/investment instrument you use, and your investment horizon. And in this economic climate, you could potentially lose even more money by investing the repayment money. We will explore this further in our Recommendations section below.
Option 2 (A) & (B): Pay the same monthly repayment, and extend loan tenure
For option 2 (A), you will pay the amount as you did before, but the loan tenure will have to be extended to accommodate the six months of additional interest accrued. In the RM500,000 outstanding home loan example, you’ll be extending the tenure by a whopping 21 months (and not just by six months, because the interest accrued during the 6 months will be added to the principal and accrue interest from the resumption of payment). The total additional interest charge for this option is RM33,866.34. Do not opt for this.
Some banks will also offer Option 2 (B), which is extending your loan tenure by 6 months (i.e. the same duration as the deferment period), but you will be required to bump up your monthly repayment. In the RM500,000 home loan example, you will need to pay a new monthly amount of RM2,438.33 (RM47.81 more than before). The total additional interest charge for this option is RM17,163.94. That’s lower than Option 2 (A), but here’s a better option:
Option 3: Pay a higher monthly repayment, but keep the loan tenure unchanged
This option is the best repayment option to take. Because you are opting to pay more each month to offset the outstanding balance (both principal + original interest and deferred period interest), the total interest charge will also be lower. The new monthly repayment amount will be RM2,459.88 until the end of the loan – RM69.36 more than your old repayment amount. The total additional interest charge for this option is RM10,139.68 – just RM139.66 more than Option 1 where you fork out a huge lump sum.
To summarise, here’s a table to show the possible repayment options after the deferment period, and how much additional interest will be charged as a result of the deferment:
|Option 1||Option 2 (A)||Option 2 (B)||Option 3|
|Repayment difference||0||0||+ RM47.81||+ RM69.36|
|Loan tenure||+ 6 months||+ 21 months||+ 6 months||Unchanged|
|Total interest charged from deferment||RM10,000.02||RM33,866.34||RM17163.94||RM10139.68|
*Update 6 Apr: Fixed error on Option 1 (loan tenure should be +6 months)
As you can see, how you repay your loans after the deferment period makes a huge difference.
What about Islamic home financing?
Now, if you’re on an Islamic home financing plan, you can ignore all of the calculations above. Since Syariah principles forbid compounding profit (i.e. no profit from accrued profit), regardless of whichever repayment option you choose, the financial commitments will be the same: you just need to repay the accrued profit from the 6-month deferment (i.e. RM10,000.02 in the example used in this article).
It’s best to check with your bank on how the repayment will be implemented.
Relief For Those Who Need It
As you can see from the calculations above, the total additional interest charged is certainly a huge number, but when spread over a few decades this number becomes noticeably more manageable. This is something important to keep in mind.
To put it in context, someone servicing a 30-year home loan with RM500,000 outstanding may lose their jobs during this period. This deferment frees up RM2,390.52 each month from their monthly commitment, which can mean having food on the table, buying schoolbooks for the children, not defaulting on a loan, and overall, alleviating immense financial stress. In exchange, when things are hopefully better, he or she pays RM47.81 or RM69.36 more to their home loan repayments each month for the next 30 years.
For those who don’t have a choice, this trade-off is worth every Ringgit.
Should you take the deferment? Our recommendation
Take the deferment if…
- you have an existing car loan or personal loan (and their Islamic financing equivalents). This is a no-brainer – you suffer no implications, and your loan resumes from October 2020. You should already receive an SMS from your bank informing you of the deferment to your existing loan, and how to opt out.
- you face some serious cash flow issues during this period and have no emergency funds – this deferment is to alleviate this exact concern. If your employer has imposed a salary cut – or worse, a round of layoffs – this deferment will ease the financial stress. Don’t forget to also check what financial aids you are eligible for. This is a very difficult period, but we can pull through.
- you foresee a potential cash flow issue – with no job security across all industries, you’ll never know what might happen. Even if you can afford to service your loans, at the very least this deferment helps you build a buffer for the future (see below). Note that you can opt in for the deferment at any time during these six months, so you don’t have to make a decision now.
- your risk appetite is high enough, or if your investment horizon is long. You can make use of the monthly repayment to make more money (provided you have enough money set aside for other commitments). Here’s how much you stand to earn if you put this amount in a fixed deposit or an investment product (assuming you invested ALL the 6-month repayment, selected repayment option 3, made no withdrawals, and the projected returns are guaranteed):
|Return of investment||4%||6%||8%|
|Total interest to repay (Option 3)||
|Total earned after 30 years||RM33,110.19||RM71,587.09||RM141,007.53|
|Breakeven point||13 years, 7 months||9 years, 2 months||6 years, 11 months|
|Net earnings after 30 years||RM22,970.51||RM61,447.41||RM130,867.85|
- Finally, if you are on an Islamic home financing plan, take the deferment. Syariah principles forbid any form of compound profit, which makes a huge difference in terms of how much profit you pay to the bank. With zero compound profit on both the principal and the accrued profit during the deferment, you’ll enjoy the best of both worlds (6 months payment deferment and low profit charge).
DON’T take the deferment if…
You should understand that this deferment programme is primarily aimed at those who may face immense financial distress due to the economic effects of the Covid-19 pandemic. If you are able to service your loan as usual and are financially secure in this economic climate, you can consider opting out of the deferment programme.
That said, it makes sense to still take the deferment and save the money in a fixed deposit with 4% p.a. returns for the next 30 years. If you chose repayment Option 3 in the example above, you will earn a nett amount of RM22,970.51 (after deducing the interest charges in the same timeframe). It may not be much, but hey, this is RM22,970.51 more in your pocket than if you didn’t take the deferment whatsoever.
BNM’s deferment programme is a beneficial step for all Malaysians currently servicing any form of loans/financing plans, and an important one during this challenging period. We recommend those eligible to take the deferment, as those who will need it will have a brief respite, while those who can afford to service their loans can actually earn some money by saving or investing the deferred instalments.