‘Get your loan refinanced if you can’t afford it’
Home loans are paid in instalments which are commonly known as Equated Monthly Instalments (EMI). This is a fixed amount to be paid by the borrower to the bank every month as a part of loan repayment. A bank considers a home loan to be in default when the borrower fails to make a payment and is behind by 90 days. In such a case, the borrower would have missed three payments of EMI.
When the home loan is in default, banks do not seize the assets of the borrowers immediately. They send a notice to the borrower stating that the EMI payment has been missed and strict action will be taken in this regard. Banks are ready to understand the various reasons behind non-payment of the EMIs, which might include financial crisis and accident if the borrower approaches the bank with an explanation. Once the reason is conveyed by the borrower or is otherwise evident to the lender, the bank restructures the EMI and extends the loan tenure on the request of the borrower. Only in extreme cases will the property be sold by the bank. If the property of the borrower is sold within a span of three years of acquisition, then the borrower can expect to receive a profit on the sale. However, if the property is sold after three years, the borrower can take the benefit of tax exemption.
Bank considers a home loan to be a Non-Performing Asset (NPA) when the borrower, in a period of 90 days, is unable to pay back the principal amount and the interest. When a home loan becomes an NPA, the bank might ask the borrower to pay the complete home loan amount.
To recover the home loan, lenders sell or seize the assets or mortgaged property of the borrower. This is an authority to lenders given under the SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act) to protect their interests.
HOW TO OVERCOME THE DISTRESS
The borrowers can negotiate with the lenders and resolve it. Borrowers can reach out to the banks with their previous bank records of repaying the loans on time and try convincing them. Borrowers can explain the reason for not paying on time with valid reasons like an accident, financial crisis or loss of job and ask for a grace period to pay back. In certain cases, the interest rates might have gone up unexpectedly and become unaffordable to the borrower.
In such a scenario, the borrower can ask the lender to refinance the home loan. This will lead to lower EMI but increase in the tenure period.
If there are other assets with the borrowers such as fixed deposits or mutual funds, they can be liquidated and the debt can be repaid. Apart from all this, borrowers themselves can sell their property and pay back the amount instead of banks taking over it and selling.
PLANNING (TO NOT FAIL)
To avoid repayment default and financial distress, home loan borrowers need to wisely preplan and analyse a few things in advance.
The monthly outgo in the form of EMI should not be more than 50% of the monthly income. The loan tenure should be as short as possible, as this will lead to lower interest payments. Financial management must be done by the borrower for timely and regular payment of the EMI. The credit score is impacted if an EMI payment is missed, which impacts the credit profile of the borrower.
The borrower must keep a track of the market regarding loans and interest rates to avail and make the best utilisation of the loan. If there are multiple loans taken from banks, then the loan payment with a higher interest rate must be paid first. Prioritisation of loan repayment is a must.
If there is any bonus received or profit made in an investment, then the amount should be used in repaying the loan rather than in spending such funds on less critical matters.