We have all heard of the term ‘home loan moratorium’ or ‘loan moratorium’, whichever you call it. However, while this was a scheme offered by the RBI for easing the pressure on consumers during the lockdown, how does an overall home loan moratorium stack up? Is it an ideal scenario? Let us find out!
What is a home loan moratorium? The Reserve Bank of India (RBI) extended a moratorium on loans as a relief measure for borrowers for several months amidst the coronavirus pandemic. Reports stated that 1 out of 3 borrowers chose the initial moratorium that was declared in the month of March even though not many people require relief immediately. A whopping majority of those taking the first moratorium also went for the extended option as per surveys. Some of those who avoided the initial one are now choosing immediate relief. Another interesting trend was that many of these people who took moratoriums were not really in need of any instant financial relief to get out of a difficult situation. Many of them fear the future and hence chose this move to conserve more money at such a time.
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Many borrowers have not only sought moratoriums for their home loans, but also for credit cards or personal loans. However, the biggest answer to the question asked at the outset is that the home loan moratorium is not a waiver of your loan payment. It is only a deferral of the same and your lender will be charging interest on the amount which is unpaid. Hence, experts recommend that while it relieves your immediate cash outflows in case of any emergency or tough period, it is advisable to only choose this if you simply cannot pay your home loan EMIs.
How It All Adds Up?
While deferral of your home loan EMIs for some time will bring you temporary relief, the costs of the unpaid amount will keep adding up. Home loans are longer-duration loans and this means a higher cost. If you are missing your EMIs early in your home loan schedule, a larger chunk of non-paid interest will be added to your home loan, since the interest portion forms the biggest chunk of the EMIs in the initial years. Even missing a single home loan payment early in the loan tenure will snowball into a major financial liability in the future according to industry experts.
For example, if a home loan borrower had availed of Rs. 50 lakh at an interest rate of 8.5% for a period of 20 years and opts for a 3-month moratorium, then the unpaid interest amount will be compounded by the lender and will add up to a whopping 10-11 extra EMIs for the tenure. The overall effect will not be as much for a home loan that is already 10 years running. Those at the last lap of their home loans will not feel much of an impact as well. A major chunk of people who opted for the RBI moratorium (2/3rds as per studies) chose to do so for their home loans. 58% of these loans had remaining tenures exceeding 10 years according to reports.
What Should You Do?
It is advisable that you should not choose any home loan moratorium as much as possible. Of course, you may be facing a severe cash squeeze and this may necessitate availing of such an option. Experts always recommend that you skimp on other costs and revamp your entire cash management system. Redirect your surplus or leisure expenses towards EMI payments and you may even stop your SIPs or other investments in dire scenarios for paying your EMIs. Yet, you should not compromise with your health and life insurance payments according to them. Many people think of taking personal loans for covering these scenarios although this is walking into a major debt squeeze all over again since these loans have higher rates of interest and will ultimately pinch you severely down the line. If nothing else, experts say that you can liquidate some surplus gold deposits or any investments which are not giving you high yields.
You will always have an opt-in¬ choice for any such home loan moratorium. If you do not choose this option, then the loan will continue unhindered. What you should check is whether your bank is not giving automatic moratorium to all borrowers, who are required to opt-out themselves. If you have already taken a home loan moratorium, then when the tenure ends, you can choose to pay off the interest accrued in this period as a one-time payoff. Or else, you may add this to your outstanding home loan and the EMI will go up likewise. The third choice is to add your interest to the outstanding home loan and hike the tenure.
The third option is most likely to be the default pick for lenders. Very few borrowers will want to make any one-time payment although it is highly recommended if possible, saving you quite a bit of money on the entire process. Those with longer tenures may feel that the EMI hike will be nominal and they may go for a higher EMI. Increasing the tenure will mean a more comfortable EMI although the overall interest outgo on the loan will skyrocket considerably. What you should do is that if you have initially increased the EMI or tenure to manage your moratorium, you should keep prepaying your home loan with bonuses, surplus funds, increments and so on. This will keep reducing the tenure and overall outgo. It will keep lightening the interest load on your shoulders.
Some Other Useful Pointers Worth Considering
- The advantages of a home loan moratorium do not outweigh the disadvantages. Yet, they include some temporary cash relief, better loan management and repayment and of course, zero impact on the borrower’s credit score.
- The disadvantages are the sizable interest that gets added to the loan, leading to a higher EMI or loan tenure and overall higher outgo. It is only a deferral of the EMI and not a waiver as most borrowers sometimes misunderstand.
- You should never forget that you are supposed to pay the EMI once again after the moratorium period.
- In the rare scenario that the financial institution makes the moratorium compulsory or you have opted for it by mistake, keep the funds separately in your account for the period and then use them for a one-time prepayment once the duration concludes.
- You should be careful about the opt-in and the opt-out options offered by financial institutions.
- At the same time, some financial institutions may offer a moratorium for a specific duration and then ask customers to pay the pending amount at once. It is vital to check with your bank to avoid a pressing financial situation in the future.
