Pros And Cons Of Home Loan Restructuring

Most of the time, taking a home loan is convenient, and you can build up an asset with the ease of paying the loan in instalments. However, you feel the burden when there is a big financial crunch, economic uncertainty, job issues, and interest rate changes by the banks. After the economic uncertainty due to lockdowns and the impact on the economy in the COVID times, home loan restructuring has become a preferred option for many. 

In 2020, the RBI moratorium was given to individual borrowers to provide relief for six months till 31st August 2020. After that, all borrowers had to pay their home loans per schedule. Later, the country’s central bank gave a resolution plan to people with loans with the option of restructuring housing loans. This allowed them to change the terms of the loan once, allowing them some flexibility concerning interest rates, repayments, and loan tenure depending on their agreement with the bank or the financial institution that is the lender. 

Restructuring of home loans comes with certain conditions and has pros and cons. All these things should be considered before initiating the loan restructuring process. However, before we delve into the details, let us first understand what restructuring housing loans mean.

What is Home Loan Restructuring?

In simple terms, home loan restructuring is an option given to borrowers facing a financial crunch due to any reason. This allows them to renegotiate with the lender and change the terms of the home loan to avoid any instance of default and being penalised. 

The main aim of restructuring a home loan or any other loan is to ensure there is no break from servicing the loan, all EMIs are paid on time, and there is no default. With this, the main benefit to the borrower is to get some flexibility to pay the loan until they are financially stable.

With the option to start the loan restructuring process, borrowers usually want emi restructuring, change in loan tenure, switching to a different lender offering better terms, part prepayment, and changing home loan interest rates. As there was an option to change the lender, there was also an option to modify terms with the existing lender.

How Does Home Loan Restructuring Work?

As discussed previously, home loan restructuring is a formal process that allows borrowers facing financial stress to revise their existing repayment terms without being classified as defaulters. The lender assesses the borrower’s situation before offering suitable modifications. These may include extending the loan tenure, revising the interest rate, granting a temporary moratorium, or adjusting the EMI amount.

When opting for restructuring home loan, the borrower must submit relevant documents supporting the financial hardship. Once approved, the revised terms are documented, and the repayment schedule is reset accordingly. While this can ease short-term financial pressure, it may increase the overall interest payable over the loan’s life.

It is important to understand that restructuring home loan is not automatic and is subject to the lender’s internal policies and regulatory guidelines. Borrowers should carefully evaluate the long-term impact before applying for home loan restructuring.

Eligibility for Home Loan Restructuring

A borrower is eligible for application for restructuring of the loan if:

• The pandemic has impacted you due to loss of business or income
• Documents are verified and adequately checked by the lender
• The policy of the lender on home restructuring
• Ability to repay the loan which depends on factors like credit history

Pros of Home Loan Restructuring

When you file an application for a loan restructuring, you should first check your eligibility and also know the pros and cons of home loan restructuring. Let us talk about the pros first.

• Gives you the option of a loan moratorium period of up to two years
• Increase the tenure of the loan to help in EMI restructuring depending on the capacity of the borrower to repay. This can only be done for a period of up to 2 years and not more
• The borrower has the option of transferring the outstanding interest on the home loan to a different credit facility, as this will reduce the burden
• The personal account of the borrower will not be a default account and instead continues to be a standard account unless the application for restructuring of loan is processed
• There is a time of 90 days given to the lender to implement the plan of home loan restructuring, and if this is not done, the account will be treated as a non-performing asset
• With EMI restructuring, the financial strain on the borrower can reduce and helps them better to plan on how to repay the loan

Cons of Restructuring Home Loan

As there are pros to the process of housing loan restructuring, there are cons as well, and it is always wise to weigh all options before deciding on the same. 

• When you apply for restructuring, there will be an impact on the credit score, which will have to be improved over time by paying the EMI on time.
• There are charges which might be charged for home loan restructuring and paying this can also be a financial strain.
• As interest payment holidays and the repayment period increases, there is an accumulation of overall interest that is payable and thus, in the long run, can affect the finances.
• If you reduce the monthly outgo with EMI restructuring, there will be an increase in the tenure, which means that there will be a loan on your head for a longer time

Steps in the Home Loan Restructuring Process

The steps involved in home loan restructuring can differ with lender. That said, here are the ones typically involved:

Step 1: Review Your Financial Position: Begin by assessing your current income, expenses, liabilities, and repayment challenges. This helps establish the need and scope for restructuring home loan options.

Step 2: Submit a Restructuring Request: Approach your lender with a formal request, outlining the financial stress faced and the type of relief required, such as tenure extension or EMI revision.

Step 3: Lender Evaluation and Discussion: The lender evaluates your repayment history, credit profile, and future income potential, followed by discussions on feasible revised loan terms.

Step 4: Documentation and Approval: Once terms are agreed upon, the revised structure is documented through an amendment or fresh agreement.

Step 5: Start Revised Repayments: EMIs are paid as per the new schedule, making timely payments essential to maintain loan discipline.

Key Factors to Consider Before Restructuring Your Home Loan

Here are some things to keep in mind when restructuring your home loan:

• Assess Your Financial Position: Review your current income stability, monthly obligations, and future cash flow to ensure the revised terms are manageable over time.
• Understand the Revised Terms: Evaluate changes in tenure, interest rate, or EMI amounts to see how they affect the total cost of borrowing.
• Communicate Clearly with Your Lender: Transparent discussions help set realistic expectations and improve the chances of securing suitable restructuring options.
• Seek Professional Guidance: Consulting a financial advisor can help you understand implications and choose the most suitable restructuring home loan approach.
• Focus on Long-Term Viability: Ensure the restructured loan supports sustained repayment without compromising future financial goals.

Conclusion

Home loan restructuring is a great option especially given to those financially impacted in COVID times. However, it is always good to weigh the pros and cons. Ideally, housing loan restructuring should not be the first choice, but if you are still short of funds and need help, avail of the home loan restructuring from Tata Capital. If you have an option, rework your finances and check if you can continue to service the loan without any issue. However, for those who do not have an option, it is a good option given by the RBI to help people facing a financial crunch.