Bank Negara Malaysia (BNM) made an announcement on 25th March 2020 as part of the measures to help individuals, SMEs and Corporate affected by COVID-19 (coronavirus).
Moratorium of 6 Months on Bank Loans
Banking institution to provide a 6 months deferment of all loans or financing repayments with exception to Credit Card. Details could be read at BNM official site. Detailed terms and conditions can be obtained from the FAQ released. It is important to note that the interest will continue to accrue during the moratorium period.
Do Banks continue to charge interest during Moratorium?
This is the concern of everyone with regards to the announcement. We are updating our explanation in this article based on information available. Hope we are able to answer your question.
Not Compounding Interest = No Interest?
As many banks announced that they are not charging compound interest during Moratorium, many start to think that no interest will be charged during moratorium. We think this is Not Correct ! Please refer to the example below in Mortgage Loan section. Islamic version is equivalent to the No Compounding Interest case.
How Does This Affect My Loan?
1. Hire Purchase / Car Loan / Motor Vehicle Loan / Personal Loan
Most of our Vehicle or Machinery loans are based on Hire Purchase, the interest, instalment amount and number of instalment which has been predetermined during agreement (in short~ simple interest calculation). Therefore, we would assume that there would not be any extra cost to customer but would only extend the loan by 6 months.
With reference to the above, we expect that as long as you complete the 60 payments, you would have fulfilled your obligation. So, this may be the first loan that you might want to defer if you are facing financial difficulty during this period.
*Update(s) 27 Mac 2020 - Refer to guideline from RHB, it seems to be consistent with our discussion on Hire Purchase and Personal Loan above. You can refer to the AF and ASB section on RHB webpage.
2. Property Loan / Mortgage Loan / Housing Loan / Shop Loan
This is a little bit more complicated as the interest calculation for Mortgage Loan is based on reducing balance and most of the banks are using daily rest calculation. As the term ‘reducing balance’ means that the interest calculated will be based on outstanding principal calculated on daily basis.
Based on the Case Study 2 above, you could note that additional interest will be accrued during the deferment period. (for ease of calculation, we used monthly rest) What will happen next?
As you can see, the new principal is now higher than as it initially was. Now one may be given two choices, i.e. to increase the monthly instalment or to keep with existing instalment. The table clearly shows the additional cost one will have to bear with whichever decision.
3. Credit Card
This has been clearly addressed in the statement from BNM. We shall not discuss in details here. It is basically a conversion into Personal Loan with effective interest not more than 13% p.a.
This section will be entirely my personal view as we have provided facts and figures in our elaboration above.
I suggest that if you have the ability to just continue to serve your obligations, continue to serve. This is also a part of our contribution towards the nation in this time of difficulty to not disrupting the banking system. However, if one is facing challenge during this period of time, you should consider in the following sequences. First, you should consider to defer the hire purchase instalment since it is most unlikely to cost us financially. Secondly, you should consider to defer the Mortgage/Property Loan. Credit Card should be the last option that you should consider to defer as it will cost you the most.
The GOLDEN question : Should I utilise the opportunity to defer all my loan payment for this period of time?
I provided my opinion in the first paragraph in my conclusion. However, it may not be the opinion of others. Technically, you can seize the opportunity if you can manage your money effectively and know where to invest. For mortgage loan, the return should be at least higher than 4.5% for it to make sense; for credit card it should be higher than 13.5% for it to make sense. The choice is in your hands.
About the Author: Ethan Teh is a Financial Adviser with Money Sense Advisory Sdn Bhd. You can read more about him here. You can reach also reach him via email at firstname.lastname@example.org
*Disclaimer/Note : This is based on our understanding up to the time of publish. As BNM Statement stated that interest will continue to accrue during the moratorium, we are uncertain with the decision to be taken by Banks and Financial institutions. You are responsible for your own financial decision.