The article elaborates on the implication of late home payment and what can be done if you are facing problems with your monthly home loan payment.
Even the most fiscally responsible person can encounter a bad turn in life due to forces outside of their control (like say, a devastating global pandemic). That means anyone could end up being unable to meet their home loan payment obligations.
In Singapore, defaulting on loan payments can have serious consequences that potentially last for a lifetime. So loanees should be aware of what steps to take to navigate themselves through this quandary with as little detriment as possible.
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Find Out What Happens If You Miss A Home Loan Payment
Late Payment Charges
The first thing that one will encounter when they miss a loan payment is some kind of financial penalty. This will usually be in the form of default interest, which is the interest rate charged on the amount which is unpaid based on the payment obligation. This rate is often very high.
Different lenders may have different names for it, and also have different terms dictating when and how much these interest charges will be applied. However, the concept remains broadly the same. Let’s say a home loan requires a S$2,000 monthly repayment, and the borrower can only make partial repayment or is unable to pay it at all. The amount of money owed is then charged a default interest and the increased amount is then added back to the loan balance.
Example: Let’s assume you took up a home loan of S$600,000 with 75% financing for 30 years.
Loan Amount: S$450,000
Loan Tenure: 30 years
Interest Rate: 2% p.a.
Monthly instalment: S$1,663.29
Using DBS late payment charges of 5% above DBS Prime Rate (4.25%)
The late payment charges= S$1,663.29 (monthly instalment) x 30/365 x late interest (9.25%)= S$12.63
Consistently failing to make full repayment could then mean that the interest owed will compound, resulting in negative amortization. This is when a housing loan balance increases rather than decreases as time goes on, so one would perpetually owe more and more money.
Adverse Credit Report Rating
Making late payments can cause your credit score to fall, which is bad enough but can still be turned around. However, if you have defaulted on your loans, it will appear on your credit report indefinitely. This could have multiple repercussions.
Firstly, it could mean that you will never be able to take out another loan or credit card again, as your reputation and credit trustworthiness has been permanently tarnished.
In addition, it could also affect your employment opportunities as many companies have stringent policies against hiring people who are in debt, or who have defaulted on their loans before. This is especially true for industries such as Banking and Finance, for obvious reasons.
Read also: Understanding Your Credit Report from Credit Bureau Singapore - Business Owner Edition 2021
What to do if you have trouble making payment
If repayment really cannot be made, the best options to take are either to seek credit counselling or to try and refinance or reprice the debt such that the monthly payments are lower.
Refinancing Or Repricing Your Home Loan
When taking out a loan there is the option to take a fixed interest rate or a floating one. The latter is often pegged to benchmark rates like SIBOR or SORA, which can fluctuate. When it is on the rise, the interest that one must pay will also increase accordingly.
As such, if you find yourself struggling to pay off a loan with higher interest rates, it may be worthwhile to consult your lender to see if you can take up a re-financing package at a lower interest rate. Be sure to find out about the terms and conditions regarding such a move, such as:
· Whether you will incur a penalty fee for terminating your current housing loan package.
· Whether you can convert the loan to one which is more attractively priced, and the fees and charges involved.
· Whether there will be a lock-in period for the new housing loan package, how long will it last, and what are the fees and charges involved.
Using the same example as above:
Loan Amount: S$450,000
Loan Tenure: 30 years
Interest Rate: 2% p.a.
Monthly instalment: S$1,663.29
Refinancing of current best residential rates of 1.07% will result in a new monthly instalment of S$1,461.89, a whooping savings of S$201.40 in monthly instalment and total savings of S$9,367.26 within the lock-in period (assuming 2 years lock in)
If you are struggling to keep up with your home loan payments due to high interest rate, it might be time to refinance the property. There's no need for alarm or worry; we can help you find a solution that will work best for your needs and financial situation. Contact us today if you would like more information on refinancing options available!
Approach Credit Counselling Singapore (CCS) for assistance
Credit Counselling Singapore is an independent non-profit organisation that was formed to help individuals address their unsecured debt problems.
As its name suggests, the organisation mainly does its work through education and counselling rather than providing any direct assistance with paying one’s debt. But their assistance with debt management can still be invaluable.
As a trusted government social agency, CCS is able to guide you through any support measures that you may be applicable to get as well as work with creditors to help you restructure your debts.
Although Credit Counselling is only applicable for unsecured loan facilities, one might want to consider exploring this option so as to reduce their monthly cash outlay to service these commitments and free up more cash for their mortgage repayments
If your unsecured debt is more than 12 times your monthly income, CCS may advise you to take up a Debt Consolidation Plan and help you to go through the process.
Extended Support Scheme- Individuals (ESS-I)
Current support measures that are in place include the Extended Support Scheme, which is aimed at helping individuals and Small and Medium-sized Enterprises (SMEs) facing cash flow difficulties transition gradually to full loan repayments.
This scheme support allows restructure repayment plan on reduced/restructured monthly instalment on individual Mortgages, Personal Unsecured Credit, Renovation Loans, Student Loans and Motor Vehicle Loans or Other Hire Purchase Agreements.With regard to property loans, this scheme may reduce your monthly instalment obligations by up to 40 per cent, in exchange for a longer loan tenure. The programme will run up till 31 December 2021.
Selling/Downgrade Your Property As Last Resort
As a last resort, you may consider selling your home and effectively downgrading to a smaller and cheaper abode in order to better meet your loan obligations. While an extreme and inconvenient move, it is still better than to consistently fail to make payments on time and causing dire consequences such as foreclosure to occur. Should your property be foreclosed, it will almost certainly be sold at an auction for a price that is below its market value.
Exercise Prudence When Taking A Loan
As with all financial products, attention and discipline are required when taking up a home loan to ensure as much as possible that it is a prudent course of action.
Be aware also that the above information is only applicable when taking a loan from banks and other licensed moneylenders. It is not advisable to deal with unlicensed moneylenders as their terms and methods of operation may not be lawful and the risk of being scammed is high.
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