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With MAS and Banks In Talks To Extend Debt Relief Scheme, Should You Opt In Or Not? - Updated As Of 05/10/2020
Updated 5th October 2020: Extended Support Scheme - Standardised (ESS-S)
"Under the Extended Support Scheme - Standardised (ESS-S), SMEs in Tier 1 and 2 sectors from Nov 2, 2020 may opt to defer 80 per cent of principal payments on their secured loans granted by banks or finance companies, as well as loans granted under Enterprise Singapore's (ESG) Enhanced Working Capital Loan Scheme and Temporary Bridging Loan Programme till June 30, 2021.
Tier 1 and 2 sectors comprise of aviation and aerospace, tourism, hospitality, conventions and exhibitions, built environment, licensed food shops and food stalls (including hawker stalls), qualifying retail outlets, arts and entertainment, land transport, and marine and offshore.SMEs in other sectors may opt to do the same up to March 31, 2021."
Source: Business Times Singapore
Read also: What SMEs and Individuals Should Know About The Extended Support Scheme - Standardised (ESS-S): An Extension To The Debt Moratorium Programme Beyond 31st Dec 2020
This article was written on 30/09/2020 and updated on 05/10/2020 to reflect the Extended Support Scheme - Standardised (ESS-S):
The Monetary Authority of Singapore (MAS) is said to be in talks with the banks to potentially extend the Debt Relief Scheme for borrowers for as long as up to six months beyond the current 31st December 2020 deadline. A tiered approach is likely to be considered, targeting borrowers that need the most help. Should you opt for the Extended Debt Moratorium Programme?
Although we have seen the number of COVID-19 cases in Singapore now coming under control and the rate of coronavirus infection falling, it is becoming very clear that the biggest fallout from this pandemic is not the public health crisis. Instead it is the looming economic aftermath. Unemployment rates have risen and many consumers and business owners are affected by reduced income/revenue. This is especially due to many safe distancing measures still in place that are restricting businesses. Many face uncertainties over their livelihoods against what may be a record recession in our history.
In April 2020, consumers and SME owners had the option to opt for a debt moratorium programme for their unsecured and secured debts from financial institutions and insurance companies.
Let’s recap the various schemes that are in place:
Defer Repayment of Residential Property Loans
- Individuals with residential property loans may apply to their respective bank or finance company to defer either (i) principal payment or (ii) both principal and interest payments up till 31 December 2020.
- Interest will accrue only on the deferred principal amount; no interest will be charged on the deferred interest payments. Lenders will approve the request for deferment as long as the individual is not in arrears for more than 90 days as at 6 April 2020. Individuals do not need to demonstrate any impact from COVID-19 to obtain the deferment.
Lower Interest on Personal Unsecured Credit
- Individuals with unsecured credit facilities from banks or other credit card issuers may apply to their respective lender to convert their outstanding balances to term loans at a reduced rate of interest, capped at 8% (compared to the 26% typically charged on credit cards).
The term of the converted loan can be up to five years, depending on the individual’s ability to meet the minimum monthly repayment.
- This option is available to all individuals who have suffered a loss of 25% or more to their monthly income after 1 February 2020 and are at risk of incurring substantial arrears. Individuals may apply to their lenders for conversion of their outstanding unsecured debt from 6 April till 31 December 2020.
Defer Premium Payments for Life and Health Insurance
- Individuals with life and health insurance policies may apply to their insurer to defer premium payments for up to six months while maintaining insurance coverage during this period. Premium deferment is available for all individual life and health insurance policies with a policy renewal or premium due date between 1 April and 30 September 2020.
Flexible Instalment Plans for General Insurance
- Individuals holding general insurance policies, such as those for property and vehicles, may apply to their general insurance company for instalment payment plans while maintaining insurance protection.
Defer Payment of Principal on Secured SME Loans
- SMEs may opt to defer principal payments on their secured term loans up till 31 December 2020, subject to banks’ and finance companies’ assessment of the quality of the SMEs’ security. SMEs will also be able to extend the tenure of their loans by up to the corresponding principal deferment period if they wish. This relief will be available to SMEs that continue to pay interest and are in good standing with their banks and finance companies (not more than 90 days past due as of 6 April 2020).
Lower Interest on SME Loans
- Banks and finance companies may apply for low-cost funding through a new MAS SGD Facility for loans granted under Enterprise Singapore’s Temporary Bridging Loan Programme. Banks and finance companies can apply for these funds until the end of December 2020, provided they commit to passing on the savings in funding cost to their SME borrowers. This initiative will potentially lower the interest rates charged to eligible SME borrowers.
Assistance with Insurance Premium Payment
- Corporations, including SMEs, holding general insurance policies that protect their business and property risks may apply to their insurer for instalment payment plans. General insurance companies stand ready to work with their corporate customers so they can pay their premiums in smaller amounts and enjoy coverage for the paid-up period, instead of paying a lump sum premium for the entire policy period from the start.
TO TAKE UP A MORATORIUM OR NOT?
Individuals should use this opportunity to reduce their personal unsecured credit cards/personal loan debts by opting for restructuring of their debts at a lower 8% interest rates without turning to the Credit Counselling Singapore (CCS) for help or taking up a Debt Consolidation Plan which will affect their credit ratings and future borrowing chances.
But is taking up a moratorium for mortgage a wise choice?
Individuals or corporations who do not have large cash reserves and who face uncertainty about their employment or cash flows in the coming months should opt for a moratorium. No one knows when the pandemic is going to end, thus it might be a good idea to keep cash reserves for rainy days. Survival, after all, is the first priority.
For those whose finances are not in peril due to the virus, it might not be a wise move to go for a moratorium on their mortgage.
This includes those who have significant liquidity or investments that can be liquidated fast, or those who have employment deemed ‘stable’ such as government jobs. Our advice is to not opt for a moratorium on their mortgage.
When one can afford to pay their mortgage installment, it is in their best long-term interest to do so, as a moratorium won't magically make your debt disappear.
By going for a mortgage moratorium, you usually end up paying more interest as interest will still accrue on the deferred principal amount. The cost of moratorium gets higher if it is done 2-3 years upon the loan inception, as mortgage interest is calculated on a reducing balance basis. The interest payment accounts for the larger portion of the monthly installment for the first few years as compared to someone who takes up a moratorium towards the end of their loan tenure.
Illustration source: MAS
“When you defer repayment you are actually increasing the amount of outstanding debt at the end of the deferment period… And so our hope is that the economic situation improves to the point where they can start making some repayments, not all, but it can't be zero,”
(MAS) Managing Director Ravi Menon
With further news yet to be announced on potentially extending the moratorium programme, what can one expect?
Financial institutions are likely to give four options for existing borrowers who opt for a Mortgage Moratorium during the COVID-19 period:
- Make full payment of the deferred principal payments during the moratorium period.
- Add the accrued interest on the principal (if one opts for principal + interest deferment) to the outstanding loan thus leading the borrower to pay a higher monthly instalment compared to before the moratorium was taken up.
- Add the accrued interest on the principal (if one opts for principal + interest deferment) to the outstanding loan and extend a longer repayment period while the borrower pays the same monthly instalment as before.
- Extend the Moratorium Scheme for another 6 months, subject to tightened assessment, to help those who are really in financial hardship.
By extending the debt moratorium programme, banks, consumers, and SMEs are given ample time to adjust accordingly, as they might not be prepared to start repayment so suddenly after 31 Dec 2020. This might cause a spike in non-performing loans for the banks’ books.
On the other hand, MAS and banks cannot extend the programme indefinitely as this will take a toll on the financial institutions’ bottomline. A balance must thus be found.
Of course, we have seen instances where people abuse or take advantage of the scheme, by going for a moratorium when they don’t need one and thereby unnecessarily burdening the system. The funds that become available should be used for necessity and not to make investments of any sort, particularly in equity.
These provisions are given to people who genuinely have a problem.