How To Restructure Your Home Loan
Are you struggling to pay equated monthly instalments (EMIs) because you lost your job? Is your illness preventing you from paying the EMIs?
You can always ask your mortgage lender to restructure your home loan. Lenders restructure your home loan by lowering your EMIs and extending your home loan tenure.
MakaanIQ tells you what you need to know about restructuring your home loan.
Before we go into more detail about restructuring of home loans, it is important to understand when a home loan account becomes a Non-Performing Asset (NPA).
What is a Non-Performing Asset (NPA)?
According to a master circular published by the Reserve Bank of India (RBI) on July 1, 2015, NPAs are assets that cease to generate income for banks. Assets are loans or advances on which banks generate income when home loan borrowers pay the interest and/or to pay back the principal amount component. Banks consider a loan as an NPA if you fail to pay the interest, and/or to pay back the principle amount component for a period of more than 90 days.
The SARFAESI Act
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (2002) allows banks and financial institutions to auction the borrowers' properties if they fail to repay the loan. The act enables lenders to lower NPAs by adopting measures for recovery and reconstruction without court intervention.
As the name suggests, SARFAESI Act uses a three-pillar approach:
- Asset Reconstruction
- Enforcement of Security Interest
The SARFAESI Act gives power to lenders to seize securities when loan borrowers default, and sell them for recovering their loans.
The Act permits setting up reconstruction companies that buy impaired assets (i.e. NPAs) of banks and financial institutions. By buying such impaired assets, reconstruction companies wipe out the balance sheets of banks and financial institutions. This allows banks and financial institutions to focus on their core business.
The Act also allows enforcing security interest without court intervention when the asset becomes an NPA after borrowers default on loan repayment.
Restructuring of Loans
What you need to know as a home loan borrower is that even though the lender has the authority/legal right to seize of your property if you default on repayment, they are keener on finding an acceptable middle way to avoid litigation. Lenders tend to avoid the process of seizing and selling your property.
If you are unable to pay EMIs because of a transient reason, what are the options before you?
- Take supporting documents to the lender to prove that your record of repaying the home loan has been good. Convince your lender that you have no intention to default on the home loan, and that you will pay EMIs as soon as you are back on your feet (For example, if you are recovering from an illness or job loss).
- If you are facing cash flow problems, but have ample savings as banks deposits, mutual funds or fixed deposits, you can liquidate your investments in order to prevent the property from slipping off your hands. This makes sense if you have your home loan running, and have deposits invested in the same bank, or with the same lender.
- If your earnings have declined, or if your EMIs have risen (because of an increase in interest rates), you can approach the banker/ lender to ensure that your EMI is within the range that you can manage (by increasing your loan tenure).
- Find a guarantor/person in confidence who can service your liability for the time being and can prevent your property from being seized and sold.
What if these options do not work?
- Lenders allow you 60 days after issuing the notice to regularise the loan account and get it settled/written off.
- If you still fail to make the payment (i.e. in part or full), the lender will seize your property.
- You have the right (according to the SARFAESI Act) to appeal against repossession in the Debt Recovery Tribunal (DRT) if your assets were unfairly seized.
- If you default on your loan, this can have a huge impact on your credit score.