WHILE the six-month loan moratorium which ended on Sept 30 would have provided a temporary relieve to those whose livelihoods are affected by the COVID-19, it is inevitable that they would have to pay more in the long-run as all interests during that period are accrued and will be added to the total amount owed.
This also means that borrowers will now have a longer repayment period.
In the case of housing loan, some industry players argue that a longer loan tenure is better even though a shorter loan tenure results in lower interest payment (if no extra payment is made every month).
But, there are two sides of the coin when it comes to longer repayment tenure, as how industry players see it.
Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid opines that ideally, the financial commitment period should be shorter as it will allow borrowers to be debt–free sooner.
“However, it’s quite a delicate balance between long- or short-loan tenure and cash flows.
“If the immediate concern is cash flow and disposable income, then it is good to have longer loan tenure as the monthly instalment will be lower,” he said.
Afzanizam added these are something borrowers can discuss with the banks and the credit management and financial counselling agency or AKPK but they must first identify their problems and priority, then act upon it.
Meanwhile, JH Lok, a mortgage product developer, noted that assuming the interest rate and loan quantum being equal, it is true that borrowers will end up paying more interest for a longer loan tenure.
This is true even if they pay off the loan earlier and before the maturity, he further noted.
Lok said the fixed repayment amount derived from the amortisation method or reducing balance would affect the actual interest charges at the various intervals.
Citing an example, he said: “Assuming you have opted for a 25-year loan, your fixed monthly repayment will be RM2,923 versus RM2,523 for those who opt for a 35-year loan.
“So, if the borrower is very disciplined and follows through the predefined repayment schedule, but eventually decides to settle the loan earlier after just the first year, he would still have incurred relatively higher interest charges of RM24,765.87 (for a 25-year-loan) against RM24,877.27 (for a 35- year loan).”
Interestingly, he pointed out when the same variables set above are re-applied, the interest savings on a 25-year loan versus a 35-year loan may become negligible when a RM400 pre-payment is made every month.
“So my argument is, if the RM400 monthly differential sum is being dumped back into the monthly repayment as advance or prepayment, then the loan with the longer tenure of 35 years may end up almost the same as the 25-year loan based on the illustration,” he explained.
Lok cautioned that this is only possible provided the loan is a truly flexible, one that allows prepayment to save and avoid interests on a daily-rest basis.
Sharing Lok’s sentiments, another loan consultant stated a person can opt for longer loan tenure under a flexi loan and still enjoy the benefits of interest savings and lower instalments.
That said, he reminded that savings can only materialise if the person has good or strict financial discipline. – Nov 3, 2020
