How to reduce Home Loan EMIs during second wave of COVID19?

With extended lockdowns and spread of second wave of pandemic in India, it’s time to revisit your personal finance portfolio. Whether you are a salaried individual or a self employed business owner, managing your cash flows and protecting your credit score should be high on priority.

A Must Personal Finance Checklist

As lockdowns & second wave of Covid19 continue to disrupt our lives, make sure you follow some golden personal finance rules:

1. Emergency fund for next 6 months basic expenses
2. Adequate health insurance for family
3. Optimal term insurance plan: 10X annual income
4. Home Loan Insurance
5. Get rid of expensive loans & credit card bills
6. Review & rebalance investment portfolio: book profits, cut down risk & continue SIPs as per asset allocation

As we can see, there are too many steps to complete to stay money wise during the financial crisis. However, disrupted inflows may not leave sufficient cash flows for each of your financial goals. Herein, it is time to reset your loan repayments. 

Leverage Home Loan to tread through financial crisis

Currently home loans are available at lowest interest rates in past 15 years. Simply be realigning your home loan account you can ease up monthly burden amidst Covid 19. 

Current rate of interest for various loans & credit lines:

Thus recasting your home loan you can take better care of your finances. 

Let’s explore available options to reduce home loan EMIs during second wave of COVID:

RBI’s resolution framework 2.0

RBI has announced resolution framework 2.0 for individuals as well as MSME borrowers with credit accounts up to Rs 25 Crore. The borrowers can apply for loan restructuring for maximum up to 2 years till September 30,2021. Herein borrowers in addition to resolution framework 1.0 (Moratorium 2020 & restricting thereafter) can apply for any of the following for max of two years:

1. EMI Moratorium
2. EMI reduction 
3. Tenure extension
4. Loan restructuring

The applicant’s loan account should be standard as on March 31,2021 to apply for this restructuring facility. The lender will take max of 90 days to implement the restructuring. The request for restructuring of loan will be reported to CIBIL but will not impact the credit score. However, later on the score will depend on the continuity of loan repayments following restructuring & thereafter. 

You can restructure single or multiple accounts under this scheme. The approval depends on the board of each lender. Alternatively it will wiser to opt for a debt consolidation or seek a top up loan to reduce your monthly EMIs.

Switch to a repo linked home loan

As discussed above, home loan interest rates are lowest in the past decade. Whether you have an MCLR based home loan or fixed interest rate home loan, you can switch to a repo linked home loan and avail of a good rate concession.

Home Loans prior March 2019 were generally over 8% p.a. So switching the rate regime can save you enough cash in hand. 

Let’s use a Home Loan EMI Calculator and understand how switching a home loan will reduce your home loan EMIs.

Case A: 

Home Loan Amount: 75 Lakh
Balance Tenure: 15 Years
Rate of Interest: 8.5 % p.a

EMI: 73,855

Total interest payable: 57,93,984

Case B (after reducing interest rate):

Home Loan Amount: 75 Lakh
Balance Tenure: 15 Years
Rate of Interest: 7.25 % p.a
EMI: 68,465
Total interest repayment: 48,23,650

Thus switching interest rate regime & reducing rate will save Rs 5390 per month & Rs 970334 during the loan tenure.

Extend Tenure

In case you are finding it hard to repay your home loan EMIs, you can consider opting for tenure extension and reduce the EMIs. Let’s check the impact of tenure extension on your EMIs using Home Loan EMI calculator.

Case C: After reducing rate & extending tenure in the above example.

Loan amount: Rs 75 Lakh
Interest Rate: 7.25%
Tenure: 20 years
EMI: Rs 59,278

Thus monthly saving will be Rs 14577.

Contact your existing lender

To avail of the benefits of reduced EMI on your home loan you should thus contact your lender. It is most suitable to contact the lender by email or using the customer portal ID. Present your case with research. Prove your eligibility by showing good repayment history and relationship with the bank. You can use your good credit score & current market rate trends to negotiate for the lowest interest rate.

Switching home loan internally with your existing lender is less cumbersome and only a nominal fee is involved. You do not need to submit documents to start this application. Further there is no foreclosure charge involved with a repo linked home loan.

Apply for refinancing

In case you want to switch your lender, make sure you do your maths correctly. In most cases it is possible to find a better rate of interest and loan terms with the other lender. However, you should make an informed decision before starting a home takeover request. 

Some of the concerns are:
A. Choosing a deal. Before starting a home loan balance transfer request, compare home loan interest rates on an online loan marketplace website. You can conveniently compare rates using different LTV, tenure, top up or principal reduction parameters at leading banks and NBFCS. Do check leading lending offers such as HDFC, Bajaj Finserv and SBI Home Loans. Choose the one that best matches with your requirements.

B. Expect slow processing due to Covid19 restrictions. The new lender will conduct a property valuation and legal verification before accepting a home loan balance transfer request. These are physical procedures and thus you should be ready to face delay in the process.

C. Be sure of your intent. i.e. whether you need to reduce EMI, extend tenure or apply for a top up all along the balance transfer at lower rate. It is always helpful to assertively communicate your requirements with the lender.

D. A home loan is less expensive than a Credit Card or Personal Loan. Thus it is always a good move to consolidate your debts and apply for a top up. You will thus convert your expensive loans to a lower rate and save handsome amount each month. 

The above checklist would help you apply for home loan restructuring judiciously and opt for peace of mind amidst current pandemic. Stay safe & healthy.