In a recent announcement on 22nd May 2020, the Reserve Bank of India has directed lending institutions in India to extend the moratorium on term loans, which includes home loans. This moratorium will extend from 1st June to 31st August 2020.
It is the second period of a moratorium that the RBI has announced this year keeping in perspective the current economic and financial crisis that has befallen the nation. In the first round of moratorium, which extended from 1st March to 31st May 2020, approximately 30% of borrowers went for it.
This moratorium comes as a significant relief for individuals making home loan repayments due to the considerable scale of such EMIs. It would alleviate their financial crunch under the current economic crisis and provide a temporary way-out sans any significant repercussions. Nevertheless, it is essential to understand the dynamics of a moratorium before jumping on the bandwagon.
What is a Moratorium Period?
A moratorium is where a financial institution allows borrowers to delay their EMI payments, sans the possible implications of non-repayment. Such implications include marking a loan as a non-performing asset (NPA), reporting negatively to credit rating agencies, etc. Therefore, individuals who opt for the home loan moratorium will not have any negative impact on their creditworthiness or credit score.
However, as per the meaning of moratorium period on a home loan, individuals can only choose to defer their home loan repayments and not have it waived off by their respective lenders. Therefore, there are certain ramifications – both positive and negative – to this institutionalised postponement that individuals must note.
What are the Pros of Opting for a Moratorium?
The primary advantages of opting for a home loan moratorium are –
- Temporary relief
The primary motive of this postponement by RBI is to provide temporary financial relief to individuals. Opting for it would allow individuals to tide over the current monetary crisis and allow them to focus their resources on more pressing financial concerns.
- No negative impact
As in the first round of moratorium, individuals will not bear any negative impact on their creditworthiness if they opt for this 3-month delaying. Furthermore, lenders will not levy any penalty or late repayment charges if borrowers choose to go with it.
What are the Cons of Opting for a Moratorium?
The one critical disadvantage of opting for this 3-month postponement is –
- Interest accrual
Since it is a moratorium and not a waiver, interest will still accrue on the balance amount as usual. Therefore, even though individuals can put off the loan repayment, they will still have to account for the interest that accrues during this moratorium.
Thence, individuals who opt for the postponement will have to pay a higher interest amount, the timing of which will be based on the home loan repayment options that borrowers choose.
What are the Repayment Options for a Home Loan After Moratorium?
The lending institutions have collectively devised 3 loan repayment options for borrowers to pay the interest accrued during the moratorium, each having a crucial bearing on their home loan repayment schedules.
These are –
- Increasing the EMIs by keeping the tenor same.
- Extending the tenor by keeping the EMIs same.
- Repayment of the accrued interest amount after moratorium period at one go.
Therefore, to manage the burden of home loan repayments, individuals must also consider the elapsed tenor. In the initial stages, interest accrual is considerably substantial compared to when in the later stages. For the purpose of reckoning, borrowers can use a home loan repayment calculator.
Individual who are in the initial stages of home loan repayment can alternatively opt for a home loan balance transfer to reduce their EMI burden.
Regardless, borrowers should duly consider the ramifications of opting for this moratorium before going for it. Furthermore, they can also explore alternative avenues to relieve their financial crunch to avoid paying additional interest toward home loan repayment.