Should I Take a Loan Deferment as a Property Investor?
Published on April 7, 2020
Written by Germaine
Evidently, COVID-19 is wearing down Singapore’s economy and businesses. Due to that, Monetary Authority of Singapore (MAS) and other government agencies outlined – amongst other things – that banks and finance companies must allow deferments to the end of the year for principal repayments of qualifying mortgages and secured corporate loans.
For industrial/commercial/residential property owners, the COVID-19 loan deferment plan is your best option. Industrial and commercial property owners are essentially paying interest only. Residential? It is even better. You do not even have to pay monthly instalments and the interest on interest is waived.
Here are five reasons why you should take up the COVID-19 Loan Deferment:
1. Better Cash Position
Let’s look at an example:
Usual Cash Flow
Property Price: $642,000
Downpayment: $128,000 (20%)
Mortgage (30 year tenure, 2.25%): $1,963 (interest approximately $$950)
- For commercial loans (including industrial properties), banks have allowed us to defer our mortgage and only pay interest-only loans until 31 Dec 2020, until further notice.
- For residential loans, banks have allowed us to defer both our principal and interest until 31 Dec 2020, until further notice.
Rental: $3,400
Mortgage: $1,963
Management Fees: $430
Property Tax: $300
Total Passive Income: $707
Revised Cash Flow
With interest-only loan
Rental: $3,400
Mortgage: $950
Management Fees: $430
Property Tax: $300
Total Passive Income: $1,720
2. Improving Cash Flow
When we stop paying monthly instalments, our cash flow improves. In this COVID-19 crisis, there are opportunities to invest into distressed assets like stocks, properties, businesses, etc so it is prudent to keep your cash flow going.
3. Saving for rainy days
By taking an interest-only loan, you will be able to save passive income of $1,494 per month until 31 Dec 2020. This would mean an additional nine months. Assuming you saved every cent of the passive income, it would help you form a float of $1,720 x 9 months = $15,480.
4. Ability to help tenants
With the additional float, you will be able to pass some rebates to your tenants. A little help goes a long way, especially in building long-term, quality relationships. Our objective as landlords is to retain our tenants and help them when their business is not doing well. In this situation, giving your tenants a 20% rebate will help them AND you will still have a positive cash position #WinWin #StrongerTogether.
Here’s an example if you were to give the 10% rebate to your tenants:
Initial Rental: $3,400
Rental (After 10% rebate): $2,560 [$256 relief for tenants]
Interest-only loan: $950
Maintenance Fees: $430
Property Tax: $300 (Government gives a 30% subsidy and the Bill passed this on to tenants)
Total Passive Income: $1,464
5. Last but not least… in Terms of ROI, we are achieving the maximum potential.
Let’s look at an example:
If we have a $1 million property with 20% down payment, 2% interest and 6% gross rental yield, using a simplified approach, the ROI calculation is:
6% Rental Yield = $60,000 Rental
$800,000 Loan, 2% interest = $16,000 Interest
Profits = $60,000 – $16,000 = $44,000
Cash outlay = $200,000
ROI = $44,000 / $200,000 = 22%
If we have a $1 million property with 30% down payment, 2% interest and 6% gross rental yield, using a simplified approach, the ROI calculation is:
6% Rental Yield = $60,000 Rental
$700,000 Loan, 2% interest = $14,000 Interest
Profits = $60,000 – $14,000 = $46,000
Cash outlay = $300,000
ROI = $46,000 / $300,000 = 15.3%
As you can see, the lower the down payment, the higher the ROI. In this current situation, if we are paying the monthly principal amount, we are effectively increasing our cash outlay in the property and reducing our ROI every month (this is why we recommend that you should gear up). Hence, if we do not have to pay the monthly principal payment, we effectively enjoy a better ROI.
If you need to defer your mortgage repayments, here are the links for the different banks:
In this time of uncertainty, it is more important than ever to stay calm and make decisions based on data and research. Do your calculations and consult a real expert (or two). Take one day at a time, one step at a time. Avoid jumping into anything or making moves based on emotions. Breathe, analyse what is given and then decide.
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