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  • Guide to Managing Your Home Loan EMI in Covid-19 Times

    The Covid-19 pandemic has resulted in a very grave economic situation worldwide. With almost every country, including India, having to go into a lockdown for months, the result has been a standstill in almost every area of economic progress and growth. This has resulted in salary cuts and job losses in nearly every industry.

    The challenge for both salaried individuals and entrepreneurs has been in managing all their expenses in the current economic situation. If you have a home loan, then your concern may be how you will manage to pay your Equated Monthly Instalments (EMI) in these challenging times.

    EMI Moratorium

    The Reserve Bank of India had announced an EMI moratorium for term loans, which included home loans. The moratorium, also called an EMI holiday, had started on 1 March, 2020, and ending on 31 August, 2020. This moratorium lasting for 6 months was meant to help alleviate some of the financial crisis and uncertainty in the wake of the coronavirus pandemic.

    The EMI moratorium was a choice that home loan borrowers could exercise. If they chose it, it meant an exemption from paying the home loan EMIs for the period of the moratorium without it affecting their Credit Scores and without a negative impact on their credit history. There would also not be any adverse reaction from lenders for not paying the EMI since the moratorium would be offered by them on the RBI’s counsel.

    The RBI permitted the moratorium to be offered by all commercial banks, co-operative banks, Non-Banking Financial Companies (NBFCs), and all-India Financial Institutions. Commercial banks include local area banks, small finance banks, and regional rural banks.

    Choosing the EMI moratorium would not lead to any changes in the terms and conditions of the term loan. However, the interest will continue to accrue on the outstanding loan amount during the period of the moratorium. This would result in an increase in the interest component of the home loan. This would result in the loan repayment tenure being extended in order to complete payments for the increased loan amount due to the increase in interest.

    The RBI has not yet announced any extension on the EMI moratorium period beyond the last date of 31 August, 2020, which means that if you have chosen the EMI moratorium, you will have to start paying your home loan EMIs from the month of September. How can you ensure that you continue to pay your EMIs while also having enough to cover for the rest of your household expenses?

    Lowering your home loan interest rate

    One way in which you can manage your home loan EMI payments during the economic crisis brought on by the coronavirus is to negotiate with your bank, NBFC, or other lender to lower the interest rate on your home loan. They may be more willing to do this if you have been timely with your loan repayments up to the point of the pandemic.

    Although the RBI had slashed repo rates in order to encourage banks to also lower their lending rates, with many banks doing so as well, this will only be applicable on fresh loans or on loans with floating rates of interest.

    Switching from a fixed interest rate to floating interest rate

    If your loan was taken years before or has a fixed rate of interest, and the fall in interest rate is not applicable for it, you could request for a lower interest rate by paying a small conversion fee, which is usually a couple thousand rupees.

    Switching your loan to another lender with balance transfer home loan

    You could also apply for a balance transfer home loan, where you transfer your home loan to another lender who offers a lower rate of interest than your current lender. While there are certain fees that has to be paid for this, it might still be more cost effective in the long run.

    Switching from MCLR to RLLR

    If your loan is linked to the Marginal Cost of funds-based Lending Rate (MCLR) rather than the Repo Linked Lending Rate (RLLR) it would be a good idea to make the switch to RLLR. This is because the repo rates are linked to the repo rates announced by the RBI, which has been reducing repo rates in response to the coronavirus impact on the economy. This will bring down interest rates on home loans that are linked to the RLLR.

    Liquidating Savings

    Another way in which you can pay off your high-interest home loans is by liquidating your savings, which could be in fixed deposits or other savings instruments. However, do note that it is equally important to have a good balance of savings and investments. Still, with the government lowering the interest rate on fixed deposits, thus earning much lesser interest than before, it is best to weigh the pros and cons to decide if you need to liquidate some of your low-interest savings funds in order to pay off your high-interest home loan EMIs, which would help to reduce your interest debt burden in the long run as well as decrease your repayment tenure as well.

    Choose from any one of the solutions listed above to help you manage your home loan EMI during these challenging times.

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