Saturday, April 25, 2020

5 Reasons Why I Chose To Defer My Mortgage Payment

One of the initiatives that were rolled out by MAS in order to assist homeowners during this period of Covid-19 is to allow for deferment of home mortgage payment.

As more than 90% of all Singaporeans tend to be homeowners, this measure will enable most people to take a breather in the midst of this pandemic crisis, which have seen plenty of job losses or pay cuts.

The deferment will revolve in between May to Dec 2020, so we are talking a period of about 8 months. This is not a long time, considering that most of us are already on a 20 to 30 years mortgage.

In the last article, I wrote that I will be applying for the deferment because I see the positive upside more than over the negatives.

In this article, I will pan out my reasons why I chose to do so.

For disclosure purpose, my application was approved by the bank with a facility letter as prescribed below.

1.) Cashflow Breather

One of the most obvious reason why the measure was rolled out was to enable homeowners a cashflow breather, especially in the midst of the pandemic crisis where uncertainty hangs towards job guarantee and pay cuts.

For the majority of us who has mortgages as one of our big expenses to cater to, the loss of employment could mean that homeowners might default or have difficulties making payments to their monthly mortgages. This could not only be detrimental to the industry as a whole but also towards individual's credit score.

For myself, the deferment allows my current position to be more cashflow positive than previously because I am still collecting rental which means the income will go directly to my pocket without having to serve the mortgage during this period.

I could then use this excess income to beef up my emergency funds and/or capital injection as warchest. 

2.) Mortgage Interests Rates Are Heading Southwards

We are currently in an era where every central banks are cutting interest rates and are heading towards zero funds rate. 

What this means for homeowners is we are likely to pay cheaper borrowing rates as our mortgage rates are dependent on SIBOR, which has been on a trend down since 2017.

The current 3 months SIBOR is at 1.6% and this number will look to go down further in the next couple of months.

In fact, just last month alone, I've received a letter from the bank that they have revised the repayment downwards due to the lower interest rate.

P.S: If you're currently paying more than 1.6% and are relooking to refinance into floating, you may refer to my link here where a consultant will contact and advise your availability to refinance.

3.) Interests Will Only Accrue On Your Principal (T&C)

Most banks will allow for 2 types of deferment.

The first is a deferment of only the principal, which means you will still required to service the interest amount.

The second is a deferment of both the principal and interest, which means you are not required to service anything during the deferment period.

For the majority of the banks (need to refer to their T&C), interest will only accrue on the principal but not on the interests. This implies that only simple interests will apply and not on compounding interests. 

You compare this with how compounding complies with your credit card debt and you will understand what I mean.

4.) Deferment is a Short Period

The 8-month deferment period is a short subset of the overall mortgage period, which for most tends to be for as long as 20 to 30 years.

What this means is that you are simply extending your current loans from 30 years to 30.8 years, which is not a big deal by any standard.

But the option of having this will have a bigger impact to many, especially those who needed them badly during this period.

Banks will also show you how much interests are being accrued during this deferment period, which for my case below shows $12,474.85.

One has to be very careful when reading and comparing this. 

It does not means that I will be better off by $12,474.85 if I hadn't taken this deferment option as I am likely to incur interests accrued under normal circumstances. What this means is throughout my tenure period, I will be worse off by $12,474.85, which in arrears of a long 30 years, came out to be a very small amount of re-amortisation every month post-deferment.

5.) Find Something That Is Above 1.6% ROI

Even if I do not urgently need the cashflow at this point, all I needed to do is to find an investment that will return me 1.6%/annum for me to be "better-off". 

I could look for investment opportunity in the market or simply lock this money into an CPF-SA (would be stupid for me to do so) or leave it at DBS Multiplier for emergency funds purpose.

I think at this point, while the cons are there with higher repayment being re-amortized post-deferment, the advantage has clearly outweigh the cons, at least for me and this is the reason why I chose to do so.

Thanks for reading.
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  1. Hi B, the deferment can be up to 8 months?

    Wow, I confirmed my refinancing end Jan to take effect Apr. It is the wrong timing as I incurred higher interest of 1.8% fixed rate 2y. If it will be in Feb, I will have taken the floating rate. Anyway, I am always bad in timing.

    I am actually surprised that the interest rate is not lower than in 2010 when I got 1.6% and less than 0.85% following year.

    Also, I had pare down more than >6 figs LS repayment. Initially I wanted to pay down even more, but towards end Jan, I started to tink about Covid and reduce it. Now cannot reverse anymore... arggg....

    1. Hi Rolf

      Yeah the deferment they allowed it for 8 months but its not free lunch.

      You pared down 6 digits by lump sum so you must be pretty confident about the state of your cashflow.



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  2. Hello,

    Just for my enlightenment, why is putting into CPF SA a stupid tactic? Is it because its illiquid?

    I assume you borrowed a bank loan?

    1. Hi Turbo

      Just to clarify, it's not a silly strategy, it's just silly for my own case because I needed a cashflow liquidity and putting one on top of SA will not have helped me solve the issue.

  3. Hi! Do you know whether deferring the payments will extend your lock-in period?

    1. Hi Clara

      I don't know for sure but I think it won't affect your lock in period cos your interests are still running.

    2. This comment has been removed by the author.

  4. Hi B, I tried applying for the deferments of mortgage and let's see if they approve.

    Normally after every refinance period, I will pare down LS. Actually in Jan I requested for a larger amt LS repayment, but due to covid, I hesitated and had a last min cut. But still 100 over K payments and a part of it actually comes from my OA which I did not wipe out previously.

    My cash position is still comfy in my own standard. I reckon sufficient bullets to survive w/o job and to invest in the downturn I think. But it does not come easy. It is patience for the past years. And I also have other income aside job coming from rental of property. So I guess it is quite ok.

    Still, I think it is better to be cautious in using our cash during this unprecedented times of uncertainty.

    1. Hi Rolf

      Since your cash buffer is still sufficient, then I think you don't have to defer cos it will then defeat your original intention to do a lump sum repayment which is to save on the interest costs. By deferring, you are reversing your earlier action.

  5. "Banks will also show you how much interests are being accrued during this deferment period, which for my case below shows $12,474.85.
    "all I needed to do is to find an investment that will return me 1.6%/annum for me to be "better-off".

    I dont think its correct to break-even with 1.6% in 1 year.

    Plainly looking, assume u are paying $3000 a month for mortgage, you are 'borrowing' $24,000 and paying $12,000 interest for that. -- based on simple interest computation, u need to make 1.6% every year for 31years to break even.

    CPF gives 2.5% interest tho, so u can effectively put the 24k into cpf and get back your interest within 20years.
    but then there is the 12k which u need to pay interest for thereafter....

    why the interest is so high for this 'scheme', cos the interest is charged based on the larger quantum that was outstanding.

    my take on this is 3 categories of people shd do this:
    1. Those facing dire cash flow problems and really need the cash right now to tide over this crisis.
    2. Those who have only 1-2 years of mortgage left with the bank, the accured interest will be very low and can easily beat the bank interest rate with the cash 'received'
    3. Those who are financially savvy enough to consistently generate a return of more than 3% annually over the next 20years.

    Welcome any thoughts and comments...

    1. Hi Keizen

      Your thoughts are correct.

      I wasn't referring to 1.6% in one year but 1.6%/annum for the next mortgage life. To be honest, it's not very difficult to beat, like you said even dbs multiplier, cpfoa can easily beat for now, let alone Equities return. I am of course also assuming folks who are taking advantage of such falls under the three categories you mentioned, either desperate or think they can beat the returns.

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