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As the second wave of the Coronavirus pandemic assumes massive proportions (India is currently reporting around four lakh new infections and more than 3,000 deaths on a daily basis), those servicing long tenure loans like home loans have additional reasons to worry, apart from staying safe during this crisis. How would one pay the home loan EMIs, if they were to lose their job?
Home buyers in India largely depend on housing finance to make a home purchase. This means a large number of buyers are under tremendous pressure due to the human and economic calamity caused by the COVID-19 pandemic.
According to the Centre for Monitoring Indian Economy, the second wave of COVID-19 and the lockdowns it has induced, have impacted over 75 lakh jobs, taking the unemployment rate to a four-month high of 8%, in April 2021.
So, what should a home buyer in India do, if his income sources have been adversely impacted by the Coronavirus crisis?
“Ideally, a home loan borrower should include his home loan EMI of at least six months in his emergency fund. Including this would allow the borrower to continue with his EMI payments, even during financial emergencies like job loss,” says Ratan Chaudhary, head of home loans, Paisabazaar.com.
However, what if you have not? Mentioned below are some options.
Opt for EMI holiday, if available
Announcing major relief to home loan borrowers in the aftermath of the COVID-19, the RBI on March 27, 2020, deferred EMI payments under a three-month moratorium period apart from bringing down the repo rate to an all time low of 4%. The RBI further extended the loan moratorium by another several months to provide better cushion. The RBI also advised banks not to categorise late payment of long–term loans as non-performing for the period between March and August 2020.
While the industry expects the apex bank to announce ‘Moratorium 2.0’ in the aftermath of the economic shock caused by the second wave of the pandemic in India, the RBI is of a different opinion, at least so far. In April 2021, RBI governor Shaktikanta Das said there was no need for a loan repayment moratorium ‘at present’, stating that businesses were better prepared to face the situation. While clarifying that the central bank would not resort to any knee-jerk reaction to a situation, Das said, “We will watch a situation, its depth, gravity and impact, before taking a decision.”
If the RBI launches such a programme, there are certain things that the beneficiaries must be mindful of. First of all, it is not an EMI holiday – you will have to pay the money later, with interest. A moratorium only means that you have got a few months’ relaxation from the RBI, without the late payment being categorised as a ‘default’ in your credit history. Additionally, whether the benefit is extended to you, would be your lender’s call and the interest to be charged for the delayed EMI payments would also be at the bank’s discretion.
Suppose your home loan EMI is Rs 40,000. Upon non-payment, this amount will be added to the loan principal. In the next month, the interest will be computed on the loan outstanding, along with Rs 40,000.
For a borrower who has been laid off, not taking this option is not actually an option. “While availing of the moratorium will cost them additional interest cost, it will give them at least a two-month window, to get a job or arrange funds from other sources, without hurting their credit score,” says Chaudhary.
Money from severance package
Use the money from your severance package: Once any moratorium period ends, a borrower will have to arrange the money to pay his home loan EMIs or face the usual consequences – the default would find a mention in your credit history and the bank would charge a penalty on each default, apart from the interest.
At this point, you may be forced to use the money from your severance package to make the payment. This amount would technically be equal to the salary of the number of months mentioned as your notice period under your job contract. You will for instance, get at least two months’ salary as part of your severance package, if your notice period is two months. Since this money is all you have for the time being, you have to be careful in spending it. While you use this money to pay the home loan for now, look for other options in case you are not able to find employment for the time being.
Use Fixed Deposit (FD), Recurring Deposit (RD) money
Use your savings: You could also depend on your FD and RD to make the EMI payment for the simple reason that the interest you currently get on these (SBI FD interest is 5%-5.5% for a one-year tenure, at present) would be much less than the interest you would pay on home loans (SBI home loan interest rate on a loan size of Rs 30 lakhs is 6.7%), more so in case of a default.
“Those who have failed to make provisions for home loan EMIs in their emergency fund, can redeem their existing fixed income investments not tied to any crucial financial goals, such as retirement corpus, children’s education fund, etc.,” says Chaudhary.
Withdraw from Provident Fund (PF)
Use your provident fund money: To offer support to its members during the second wave of the COVID-19, the EPFO, on May 31, 2021, announced the facility of withdrawal of a non-refundable COVID advance. With this, EPF subscribers can now make non-refundable withdrawal from their PF account that could be the basic salary and dearness allowances for three months or up to 75% of the balance in their account, whichever is less. This amount could help you to pay the home loan EMIs for some months, till you find alternate sources. The best part of the plan is that your request of withdrawal of the PF money will be addressed within three days.
Last year, too, the Labour Ministry allowed the 60 million subscribers of the Employees’ Provident Fund Organization (EPFO) to withdraw a portion of their retirement savings through a notification on March 29, 2020.
Sell gold, liquidate debt instruments: Investment in various debt instruments can be liquidated at this juncture, to pay the home loan. You could also pledge gold and jewellery, to arrange funds for home loan EMI payment. Amid gold prices touching new lows each day in the aftermath of the pandemic, you might not get what you expected from the yellow metal – on May 3, 2021, gold rate for one gram of 22-carat stood at Rs 4,416, a drop by Rs 31 from April 30, 2021.
You could also consider selling automobiles, furniture and gadgets that are not a necessity at this point.
Alternatively, you could also take loan against gold – the interest rate on loan against gold starts at 7.25% and goes up to 18% annually. Considering this is a secured loans, banks would process the loan request quickly.
Equity investments, opines Chaudhary, should not be touched, as this would mean converting your notional losses into real ones. “The ongoing correction in the equity markets would have already reduced their portfolios by at least 30%,” he says.
Borrow from family, friends
Look for family support: Borrowing from family members and friends who are in a position to lend you money for the time being, could be another option. This option is advantageous as:
- You will not have to pay an interest on the amount.
- You will have more willing and less scrutinising lenders than a bank.
- You will not accrue penalty on the interest that you are not able to repay within a specified time.
Nevertheless, be realistic about the timeline when you plan to return the money as you are running the risk of stressing your personal relationship here.
See also: Home loan tax benefits
Loan against insurance policy
Your life insurance policy can also come to your aid, if you have to borrow money and have no other option at your disposal. You can opt for a loan against the insurance policy. Apart from the fact that your insurance company will be able to disburse the loan quickly (it already has all your details), this debt would be comparatively affordable. The rate of interest on the loan against an insurance policy, is much cheaper than getting a personal loan.
Things home buyers should not do if they are paying EMI
Here are certain things that you should not do, as you deal with tough times in your life:
Avoid the lender: The first thing the borrower should do, is to inform the bank about any job loss. Avoiding them at this juncture would be the worst thing to do. Genuine borrowers would not find it difficult to convince the bank to refinance the loan. For example, by prolonging the tenure, the EMI amount could be reduced.
Expect a salary hike: In a bad job market, finding a job might be a painful process. You should not be averse to a job offer that would pay you not more than your last salary package, or in fact, pay less. Remember, this is only for the time being. You may find a job suited to your skill and profile when things get back to normal.
What is the RBI’s EMI moratorium on loans?
The RBI, on March 27, 2020, allowed banks to defer the EMI payments of borrowers for the period between March and May 2020, without terming such a deferment as a default. However, loan borrowers will have to pay the accrued money later, with interest in it.
Can I use my provident fund to repay a home loan?
An individual can withdraw the funds in his/her provident fund account to repay a home loan, subject to the rules specified by the EPFO. However, using up this amount, can put one’s financial stability post-retirement at risk.