Does Home Loan Moratorium Help Home Buyers?
Has The Moratorium Relief Actually Helped Borrowers Or Just Prolonged Their Financial Commitment, In Fact Adding To The Financial Burden.
By: Sapna Srivastava
The concept of loan moratorium is not a new one. The most recent precedent in India was the RBI’s 60-day loan moratorium offer for small borrowers during the demonetization phase.
Likewise, due to the COVID-19 and subsequent lockdowns across the country, the RBI allowed banks and other lending institutions a three-month loan moratorium on EMIs from March to May 2020. This was later extended by an additional three months up to August 31, 2020.
RBI is again considering the possibility of extending this moratorium period.
The foremost concern is the continued interest for the period of moratorium that is unlikely to ease any financial pressure on the borrower. Charging interest goes against the intent of the relief the initiative intends to bring to the people in tough times of .economic crisis.
RBI has left it to the discretion of banks to decide moratorium offer and period depending on individual borrower profiles. Banks offered three options of either making a one-time payment of the interest that accrues, adding the interest to the outstanding loan thereby increasing the EMI for the remaining months or keeping the EMI unchanged by extending the loan tenure.
Clearly, the longer the remaining tenure, the bigger the impact and therefore for those with older loans, the financial impact will be lesser than the borrowers that took home loan 2-3 years ago.
The moratorium certainly helped homebuyers facing cash flow crunch due to lockdown even if it came at the cost of an increase in interest. Also, availing of this moratorium will not be considered a default for the said period.
On the downside some banks have reset their MCLR rates for borrowers who have availed the moratorium benefits, resetting their loan tenure and eventually increasing the EMI amount once the loan moratorium period is over. Such a move not only unbalances the future financial planning of the borrower but, also in case of continuation of bad economic situation the homebuyer’s may find it difficult to repay these increased EMIs.
Financial experts suggest borrowers should keep the tenure same after moratorium. This will increase EMI amount but will keep interest cost component down. If the situation permits, prepay EMIs. If one prepays most of the EMIs taken via the route of moratorium, tenure and EMI will remain the same, resulting in very little additional burden.
SHOULD YOU OPT FOR A MORATORIUM?
- If you are facing acute liquidity crunch, the postponement of EMIs will help focus on the essentials.
- If you have more than one loan, avoid moratorium on the loan which is likely to see a bigger impact post the moratorium period. This will depend on the loan amount, the residual loan tenure and the interest rate.
- Opting for the moratorium will be disproportionately negative for people with long term loans like home loans.
- If your home loan is in its initial stages, then it makes sense to continue repaying your EMIs, as interest forms a higher portion of the EMI during the initial period of the loan.
- Check the fine print including the exact monthly EMIs once the moratorium period ends. Also consider the possibility of extended financial distress situation