Loan Moratorium : The Legal Perspective and Other Options for House Buyers in Malaysia
Published on 20 April 2020 by Kooi Tock Ken
In light of the global pandemic of Covid-19, the measures taken by most of the countries in the world to contain the virus, inter alia to lockdown the country partially or fully, have crippled various industries and have caused a terrible hit to the economy of the world. In order to help the nation during this difficult time, the Malaysian. Government through Bank Negara Malaysia has announced the 6 months’ moratorium to alleviate the financial burden of individuals and SMEs (Small and Medium Enterprises).
Why Does the Interest Continue to Accrue Whilst Some of The Banks Announced That They Will Not Charge Compounding Interest?
As Bank Negara Malaysia explained that the interest will continue to accrue throughout the 6 months’ moratorium period and subsequently various banks announced that there will not be any compounding interest throughout the moratorium period, it has caused quite some confusion and misunderstanding on the matter. To clear the confusion, we will explain the interest and the compounding interest in simple mathematics as follows:
As you can see from the above calculation, for most of the mortgage or housing loan in Malaysia, interest is charged each month based on the total outstanding balance from the previous month and
therefore without waiver of compounding interest, the interest chargeable by your Bank will increase from month to month throughout the 6 months moratorium period.
However, if your bank/financial institution has confirmed that there would be no compounding interest, the interest chargeable every month throughout the 6 months’ moratorium period will maintain the same (RM2,000.00 each month from April to September following the illustration above). In other words, you are still liable to pay the interest accrued for the six months’ moratorium period even if your bank/financial institution announced that there would be no compounding interest.
Opting In Versus Opting Out Moratorium
Following the illustration mentioned above, if your outstanding loan sum is RM600,000.00 as at 1st of April 2020, after 6 months, the total outstanding loan sum will be RM612,000.00 if there is no compounding interest (RM2,000.00 interest per month throughout the moratorium period).
Depending upon your bank/financial institution and your loan package (flexi/semi flexi), you will have several options how you can repay the bank/financial institution after the moratorium period as follows:
(1) in addition to your usual monthly instalment, pay the accrued interest in one lump sum in October;
(2) as most of the licensed banks/financial institutions are now offering loan tenures to be extended in order to cover the accrued interest (not just 6 months extension as it is depending upon your loan interest rate and your monthly instalments);
(3) sign a new standing instruction with your bank/financial institution to pay a higher monthly instalment from October 2020 onwards so that the loan tenure will not be extended.
If you have opted out or if you have decided to contact your bank/financial institution to opt out from this moratorium arrangement, your monthly repayment and the loan tenure will not be changed and there will not be additional accrued interest during the 6 months’ moratorium period.
In this economic climate, you could end up paying even more if your loan interest is high and if you could not afford to pay the accrued interest in one lump sum right after the six months’ moratorium period.
From early of the year of 2020, Overnight Policy Rate (OPR) as announced by Bank Negara Malaysia has decreased (2.75% as at 22 January 2020 and 2.50% as at 3rd March 2020). When the OPR decreased, the interest of the banks will usually decrease as well. The OPR declined to 2.50% in Malaysia for the first time in a decade
resulting in a significant decrease in the loan interest rate offered by most of the licensed banks in Malaysia (4.0% per annum or even lower).
For those who purchased their properties long ago, mortgage/loan interest rates offered by most of the licensed banks/financial institutions were much higher (i.e. 4.4 or 4.5% per annum and above).
Therefore, it is prudent for all house buyers to consider refinancing, which means you could obtain a new loan/facility either from the same bank/financial institution or from a different bank/financial institution to pay off your existing housing loan/facility. In other words, by refinancing you probably could change the loan interest from 4.5% to 4.0% or lower based on the prevailing interest rate now.
We will explain refinancing in details in another article and therefore for those who are interested please check it out and call us for explanation or for assistance to apply for refinancing.
The moratorium is merely a short term relief for those who have high commitments and/or currently having housing loans/mortgages with much higher interest rates. The accrued interest during the six months’ moratorium could be adding burden to you financially in the long term and therefore it is prudent to seek other options and refinancing could be one good option to consider.
The contents of this article are not intended to constitute legal advice on any specific matter and should not be relied upon as a substitute for specific legal advice on matters or transactions.
For further information and advice on the article above or any areas of corporate and conveyancing, you may contact any of our corporate and conveyancing lawyers.