New COVID-19 Measures: Deferring Your Loan Repayments

As Singapore braces for an inevitable economic crash landing, monetary cushions are being out to catch the fall. As of 7 April 2020, Singapore started lying low in her retreat against the virus, following strict restrictions on movement under the ‘Circuit Breaker’ initiative.

Some of these measures include the mandatory closure of non-essential retails, no dining in at all food outlets and mandatory telecommuting for all companies’ staff except those working in essentials services. Big brands such as Uniqlo, H&M and IKEA are shutting their doors, just like many of their competitors across all industries. But closing the curtain for business spells huge damage to profits, while still incurring fixed costs such as rental and opportunity cost. While it is not feasible for the government to protect businesses entirely, efforts are rolled out to mitigate and for damage-control to be met out. What do these measures include?

If you are a business owner, you would be entitled to deferment in payments for principal loans sums and interest payable till the 31st of December 2020. Should loan deferments be made, the loan tenure would be increased by the corresponding deferment period. Loan deferment comes in two available options listed below:

For ease of illustration, we are assuming a mortgage with $200,000 outstanding, a remaining tenure of 20 years, at an interest rate of 2%, the extra interest cost over the remaining tenure will be:

Options for Loan DefermentIllustration on implication
Principal-only deferment for 9 months

– This means that interest is still being paid monthly

·      $1,300 for a principal-only deferment period for 9 months, and

·      $2,930 if the tenure is also extended by 9 months.

Full monthly instalment

– Interest will continue to accrue on the principal amount deferred, but no interest-on-interest will be charged during this deferment period. After the deferment period, the loan amount and interest accrued on the deferred principal will be fully amortised over the remaining loan tenure.

 

·       $1,920 for a principal and interest deferment period for 9 months

·      $3,570 if the tenure is also extended by 9 months.

 

Interest-on-interest will be waived

 

This cash flow measure is to ensure that businesses that require financial assistance to tide through the coming months of uncertainty are able to seek relief from loan repayments. While this may be a breather moment for some, caution has to be taken when applying for deferments. Overall total interest payable would increase as a result, hence deferments are only recommended when in dire need. All businesses will also be eligible for Insurance Premium Payment Deferments, enjoying continued coverage while paying for their premiums in instalment periods. Some of the participating companies include the Association of Banks in Singapore, the Life Insurance Association, the General Insurance Association and the Finance Houses Association of Singapore

For new business startups, leeway is also given to offset the cost of a new venture. Under the SME Working Capital Loan and Temporary Bridging Loan Schemes, SMEs are able to take up new loans at lower and much more attractive rates. Banks and financial institutions are to pass on any cost savings possible to SMEs and ensure that SMEs have unrestricted access to bank credits and insurance during this period. This ensures that the business scene in Singapore remains a viable and attractive option, despite the economic downturn.

All these measures are to stimulate continued Consumption and Investment patterns that form a large portion of the local GDP. In addition, measures put in place to expedite business efficacy for local SMEs could increase the safety of our supply-chains for goods and services. As various economies around the world wind down, Singapore’s supply-chain could potentially be compromised, although likely only to minimal extents.

Similar to the measures rolled out towards SMEs, individuals like yourselves will also be entitled to deferment opportunities for personal debts, loans and insurance. For loan repayments, deferment opportunities are available for both: principal-only, principal and interest deferments. For individuals with unsecured loans, borrowers are able to approach their relevant lenders to ask for a lower interest rate, capped at 8% and tenure up to 5 years. For more specific loan needs, do approach your respective banks for more information.

While it seems that this is a good opportunity to defer loan repayments and take up new loans for SMEs at record-low rates, it is better to consider the long-term repercussions. Postponing of loan repayments is only encouraged in dire situations and should not be abused in the expenditure of other non-essentials. Not only will you accrue greater overall interest payable, given the uncertainty of the situation, it is uncertain if one would be able to repay a higher sum in the face of poor market sentiments and higher risk of retrenchment.

Post COVID-19 situation remains a huge question mark. Depending on the severity and extent of this pandemic, it could resemble the detrimental market conditions that of 2008 World Financial Crisis. In that year, many banks in the US such as Merrill Lynch and the Royal Bank of Scotland were suffering major losses in the trillions within the first 3 weeks. In Singapore, the fiasco saw 900 staff retrenched by DBS in the November of 2008, with other companies resorting to cutting lean with wage cuts and hiring freezes. With the gloom economic prospects, banks could run into potential problems post COVID-19 situation.

While banks are incentivised to afford attractive rates to its clients in the hopes of retaining reasonable levels of profits for business survivorship, over-lending and lack of sufficient information about borrowers could spell a catastrophe. With low interest rates, borrowers are incentivised to take up loans, with some seizing the chance to invest in cheap stocks and shares up for grabs due to the economic crisis. However, there is a chance that borrowers might default on repayments, leaving banks with huge amounts of bad debt. Banks have to tread cautiously, maintaining a fine balance in such precarious times.

The coming weeks could be one of the most crucial. As PM Lee mentioned, no amount of governmental reliefs would be sufficient if Singaporeans are not cooperative. With the ‘Circuit Breaker’ in place, let us all do our part to remain calm and vigilant. With telecommuting being made compulsory for all non-essential sectors, staff and members of society working from home should take the chance to form greater bonds between family members and to reignite unity amongst communities. In the meantime, stay safe!

Clive Chng

Clive graduated on the Dean’s list from Nanyang Technological University with an Engineering degree. Prior to joining Redbrick, he not only served as a Project Manager for Keppel Shipyard where he oversaw multi-million dollar marine projects, but was also the Vice President for Keppel Young Leaders, focused on the development of future leaders. Being a fan of low-cost Index Funds, his passion in Investing and strong interest in understanding how financial markets shape economies ultimately fuelled his move from the field of engineering into the financial industry where his personality trait as a servant leader further allows him to service his clients effectively.
Clive Chng

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