Reasons You Should Consider Deferring Your Mortgage

One of the relief measures rolled out by financial institutions is the ability to defer your mortgage payments up to 31st Dec 2020. Obviously, if you are running into cashflow issues, this is an option you would surely take rather than defaulting on your home loan.

Does it, however, make sense for people who are still financially able to service their mortgages?

MAS discourages this, as do a few online opinions I came across while researching this topic, citing the higher interest you would have to pay as a result. The banks readily echo this, but I think this is too superficial a view to take. Having to pay more interest doesn’t necessarily mean a bad thing.

How it works

From May till 31st December 2020, you are able to apply to defer your mortgage with your bank. During the deferment period, you can opt to pay only the interest portion of your mortgage, or avoid paying the mortgage in its entirety for the rest of the year.

While this happens, interest will only accrue on your principal, and not on the accrued interest. Let’s look at DBS’s example:

By deferring your mortgage for 8 months, you incur an additional interest of $3,000 on your principal owed. This interest will not generate further interest. You have put off $8,440 of repayment (8 months multiplied by $1,055).

Thereafter, the mortgage is re-amortised to a higher monthly instalment of $1,095.

Different banks have slightly different options available. For instance, DBS and Standard Chartered do not extend the original loan tenure. UOB extends the loan tenure by the number of months deferred. OCBC allows an option between the two choices.

Either way, you are going to incur additional interest on your mortgage. So why do it if you are still able to finance your mortgage?

Benefit 1: Safety net in your CPF

By deferring a few months of mortgage payments, you get to keep this amount in your CPF Ordinary Account (or bank, if you are making cash payments) as a rainy day fund of sorts. In any other situation, if you fall on hard times and cannot service your mortgage, the bank reserves the right to repossess your property.

In the above example, Mr Tan would thus have $8,440 more in his CPF account after the deferment period which he can use in case of any future incidences of unemployment or financial hardship.

This deferment scheme is due to – no prizes for guessing – the ongoing COVID-19 pandemic, and even if you can still service your home loan now, I think it’s prudent to take this chance to build up a buffer against a future situation you may encounter that render you incapable of doing so. Think of it as an insurance policy of sort since banks wouldn’t be so kind outside of a viral pandemic.

This is particularly useful for people who have cleared out their savings to purchase a property. If you have used the bulk of your OA and bank savings to service the downpayment, you can take this chance to improve your cashflow position.

Benefit 2: Potential gains

Although you’d be incurring additional interest, your mortgage interest rate is likely to be lower than the interest you enjoy in your CPF OA.

In the example DBS listed, instead of paying down your principal by $8,440 and saving 2% pa interest on this amount, you can leave it in your OA to generate at least 2.5% pa interest, and benefit from the difference in interest rate over the remaining tenure of your loan. The benefit is obviously greater if you are within the $20,000 bracket of your OA which attracts 3.5% pa interest.

Considerations

Eligibility
Your monthly instalments should not be more than 90 days past due as at 6 Apr 2020.

Does it affect credit score?
No.

Is there TDSR/MSR requirement?
No.

Does it extend the lock-in period?
From what I can tell, it doesn’t, but check with your bank.

Please consult your bank and financial adviser if you should defer your mortgage as this site’s content does not constitute personal financial advice and I will not be liable for any losses that may arise.

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