Should You Opt For The Home Loan EMI Moratorium?
Many public and private financial institutions, including State Bank of India (SBI), ICICI Bank, HDFC Bank, Punjab National Bank and Bank of Baroda, have recently initiated steps to offer borrowers a six-month moratorium on their term loans. The move by the banks comes, in response to an RBI directive dated March 27, 2020, which states that a three-month deferment on long-tenure longs should be offered to borrowers, keeping in mind the Coronavirus outbreak in the country, which has caused the government to lock down the nation, starting March 25 to June 7, 2020. Subsequently, the RBI directed banks to extend the moratorium scheme for another three months.
The RBI has also reduced the repo rate, at which it lends money to banks, to 4% to offer relief to customers, including home loan borrowers, who are under tremendous monetary pressure due to the lockdown.
A home loan borrower should, however, apply for EMI deferment under the moratorium, only after understanding its financial implications, fully.
What is a moratorium?
According to the Oxford Learner’s Dictionary, a moratorium is ‘a temporary stopping of an activity, especially by official agreement”.
On the other hand, according to the dictionary, a waiver means ‘a situation in which somebody gives up a legal right or claim’.
Further, a concession stands for ‘a reduction in an amount of money that has to be paid’.
Hence, the borrower should understand that there is a lot of difference between ‘moratorium’, ‘waiver’ and ‘concession’ and that the three terms are not interchangeable.
An EMI moratorium is thus entirely different from an EMI waiver. An EMI moratorium means you can stop paying the EMI for now but you have to pay it later. An EMI waiver would mean that you do not have to pay the EMI at all, for the waiver period. An EMI concession would mean that you pay reduced EMI.
What is the RBI EMI moratorium scheme?
Though a notification on March 27, 2020, the RBI said that banks can offer a three-month moratorium period, from March 1 to May 30, 2020 (which was subsequently extended till August-end), in order to help borrowers who might be under monetary pressure, because of delay in payments or loss of income amid the COVID-19 pandemic. The RBI also said that banks should not term late payment as defaults. At the same time, the banking regulator allowed lenders to charge an interest on the accumulated liability of the borrower, as the banks deemed fit.
Interest during moratorium period
According to the RBI directive, Interest will continue to accrue on the outstanding portion of the loan, during the moratorium period. The EMIs that you do not pay during the six-month period, will be included in your overall home loan principal amount. From September 1, 2020, the bank would charge interest on this entire amount.
However, the Supreme Court has opined that the charging of interests by banks during the six-month moratorium period on term loans was ‘detrimental’, and it sees "no merit” in charging interest on unpaid interest for deferred loan payment instalments.
“Once the moratorium is fixed, it should serve the desired purposes and we see no merit in charging interest on interest,” the top court said on June 17, 2020. The top court observation came in response to a petition filed against charging of interest on loans during the moratorium period. A final decision could be made in the case in the first week of August when the next hearing is scheduled.
Advantages of the EMI moratorium for home loan borrowers
If the Coronavirus lockdown has had an immediate impact on your income, you may have no choice but to avail of the home loan EMI moratorium. For the delayed payment, no penal interest will be charged from the borrower during the six-month period. The fact that this late payment would not have any mention in your credit history, also comes as a relief for such home loan borrowers.
Disadvantages of the EMI moratorium scheme
"Only those lacking emergency funds and fixed income investments, who are free from any crucial financial goals, should opt for the moratorium available on home loans. While availing of the moratorium will cost them additional interest, it will give them a window, to get a job or arrange funds from other sources, without hurting their credit score," says Ratan Chaudhary, head of home loans at Paisabazaar.com.
While experts strictly advise to continue making payments, in case your cash flow has not been impacted due to the pandemic, banks have also put in a word of caution for borrowers, while explaining how the moratorium works. In its FAQs on the loan moratorium, India’s largest bank SBI has, for example, stated that borrowers may take the benefit under this package, if there is any ‘disruption in your cash flows or there is loss of income’.
“You must take into account that the interest on the loans, though not mandatorily payable immediately and gets postponed by three months, continues to accrue on your account and results in higher cost,” says the bank.
For a loan of Rs 30 lakh with a remaining maturity of 15 years, the net additional interest would be approximately Rs 2.34 lakh or equal to 8 EMIs, says the bank.
Ram Kumar is currently servicing his home loan. Here are the particulars:
Total loan: Rs 30 lakh
Interest rate: 8%
Tenure: 20 years
EMI: Rs 25,093
No. of EMIs: 240
Total payment over 20 years: Rs 60,22,367
Now, let us assume that Kumar has already paid EMIs for 4 years (48 months).
Payments made so far: 25,093 x 48 = Rs 12,04,464
EMIs remaining: 192
Remaining principal after 4 years: Rs 27,12,998
If the moratorium is taken for three months, the deferred payment will be: 25,093 x 3 = Rs 75,279
New principal: 27,12,998 + 75,279 = Rs 27,88,267
New tenure: 16 years
Interest rate: 8%
New EMI: Rs 25,789
Total balance to be paid: 25,789 x 192 = Rs 49,51,488
Final payment to be made over 20 years: 12,04,464 + 49,51,488 = Rs 61,55,952
Additional amount paid because of the moratorium: 61,55,952 - 60,22,367 = Rs 1,33,585