Interest On Your Loan Moratorium

Just recently Bank Negara Malaysia has issued a directive that all financial institutions in Malaysia will need to provide loan moratorium for their customers.
So which are the types of loans affected?

• Housing Loan
• Personal Loan
• Business Loan / Clean Loan
• Hire Purchase (Car Loan)
• Credit Cards - (not affected, but some banks are offering conversion to term loans)

What I want to discuss is actually the impact of the INTEREST/PROFIT during the moratorium to total loan and tenure of repayment.

Loans with Reducing Balance Interest:

Referring to the chart above, if you have followed the standard calculation, your loan settlement would be delayed by a few months or years (depending on how much is the interest of the loan)
Chart example explained: Let's say you have a RM500k loan now and you took the moratorium for 6 months. On the 7th month your loan amount is now RM510k to begin with (not RM500k 6 months ago). will affect your loan repayment (If you maintain as the same monthly repayment amount of RM2416, that extra RM10k of loan, will extend your repayment tenure by 22 months.

Certain banks have stated that there won't be interest compounding during the period of time. Means that you resume your loan settlement as usual after the 7th month.

Meanwhile, a few banks will be getting you to readjust your actual repayment amount so that you will still be able to settle the loan within the same tenure of the original loan agreement.

So which bank does what? Refer to the chart below of a compiled info of the banks in Malaysia. Disclaimer: The status is correct as per listed in each bank's FAQ at time of writing. This serves as a guide and the banks may changed their terms as the days follow. Do follow the final T&C of the respective banks for final and correct info.

Loans with Fixed Interest:
Typically Hire Purchase or Car Loans fall under this category. For these loans it is pretty straight forward. Moratorium of 6 months, means you continue to pay 6 more months after your original due settlement date. Basically just pushed back 6 months.

Why should I take the moratorium and not follow the original loan schedule?
This plan is originally hatched to make sure Malaysians would have enough cashflow for these few months for their other necessities. It is also to assist Malaysians who probably have little or no income during the MCO.
If you fall in the category of people, you probably can opt to maintain your loan schedule:

• someone who has job security. You are definitely not going to be fired or have your income slashed. (Example, probably government servant???)
• someone who has fixed income. (Example, director of company who pays yourself)
• someone who has enough umbrella money to last 6 months (cash-rich individuals who have prepared for this type of scenario)

Who should take the moratorium as a blessing:

• property investor. (You are still collecting rentals from your tenants. 6 months of rental income into your pocket !!! It is a long term cashcow anyway, so it is a blessing indeed)
• SME business owners who many need to use the extra budget to pay staff's salary or the month's lease.
• Commission earners/Contract workers who are facing low or no income during this period.
• Everyone else who need to use the cash now and doesn't mind sacrificing an extra year or two for repayment later own. Current survival is more crucial in your mind right now.

Cheers,

CK Lau 

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Should I or Should I Not Reduce My EPF Contribution?

Should I or Should I Not Reduce My EPF Contribution?

With the recent economic slowdown due to the impact of Covid19, Malaysian government has issued a few program to stimulus the economy.
One of the plan is to have your EPF contribution reduced from 11%  to 7%.
Original official statement: Reduction-of-statutory-contribution-rate-for-employees - EPF

So the question for you now is, should you or shouldn't you. Let's weigh in the pro and cons:

Lower income group:
An individual earning RM2,500 in salary would have contributed RM275 to EPF currently. But at the new rate of 7%, he will only need to contribute RM175. He will have the extra RM100 which could be very crucial in his monthly spending.

Slightly higher income group:
An individual earning RM8,000 in salary would have contributed RM880 to EPF. But at the new rate of 7%, he will only need to contribute RM560. He will have the extra RM320 which could be insignificant in his monthly expenditure.

Pros:

1. More cash on hand. The main idea of this program is so individuals would have slightly more cash to spend.
2. Some savvy individuals may divert that money into more savvy investments which will continue the role as retirement fund builder. Example: Buying into PRS, Stocks, Unit trusts, bonds, etc. (Note: for savvy investors who understands the risks of these products)

Cons:

1. Money not saved, means money spent. Not having that RM100 per month in your EPF is potentially a difference of RM45,500 in 20 years. (Compounding interest of 6%, Monthly savings of RM100 for 240 months)

2. That extra RM100 would have easily be used unnecessarily into items which is only temporary satisfaction for the individual. This may 'help the economy around', but not a good plan for that individual in the long run.

3. Your long term retirement plan will be slightly affected, and you will gradually see that there is getting harder and harder to achieve a retirement fund target that you are comfortable with.

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Should you want to maintain you EPF contribution at 11%, there is form for the employer to submit to EPF. You can find the link in EPF's website.


Next, I really should be writing on how to estimate your Retirement Goal.

Cheers
CK Lau

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