Buying a house requires a lot of planning and effort. Buyers often borrow money to accomplish their dream. Home loan is one of the cheapest borrowing means in the market in terms of interest rates and other applicable charges, such as processing fees, documentation fees, etc. While taking a home loan, borrowers usually check for the prevailing interest rates to estimate the amount of EMI they need to pay during the loan term. The EMI amount usually doesn’t fluctuate significantly in short term, so if there is any increase in the interest rate, the buyer gets enough time to adjust to it. Till last year, the interest rate on home loans was at the lowest level in the decade. Thereafter, the interest rate has significantly gone up. Large numbers of home loan borrowers are now feeling the heat. In a recent announcement during the monetary policy meet, the Reserve Bank of India (RBI) hiked the REPO rate by another 35 basis points taking it to 6.25%.
Anand Naiknavare, head business process, Naiknavare developers, says, “The RBI rate hike will definitely make the interest rate expensive, which means taking loans for retail customers, construction cost and product price pressures could adversely impact the real estate buyers’ sentiments. We certainly believe it will directly impact sustaining consumers’ demand.”
In the table, we can see that if a borrower currently takes a loan of Rs. 50 Lakh for 20 years, he has to pay approximately Rs. 6,000 per month extra as the EMI compared to a year back. Higher interest rates with higher inflation can be financially painful for borrowers who are not prepared for it.
Many borrowers have started facing difficulties managing their home loan repayment. Non-payment of EMIs can turn their home loan into Non-Performing Asset (NPA). They may lose their properties. Let’s check more details on NPA and what you should do to avoid your loan becoming an NPA.
What happens when banks recognise a loan account as an NPA?
If a borrower doesn’t pay the EMI for more than 90 days, his/her loan is categorized by the lender as an NPA. Thereafter, the bank starts the recovery procedure. Banks send a legal notice to the borrower to repay the outstanding amount within the stipulated deadline, after which the bank may auction the property.
Late payment of the EMIs, or loan becoming an NPA results in a significant fall in the credit score of the borrower. If the borrower is unable to repay the loan amount, the house which is secured with the bank is auctioned as per the recovery procedure. Usually, the fair market value of the property calculated by banks is lower than the real market value of the property, therefore borrowers lose heavily when their properties are sold in auctions.
What are the options available for borrowers whose loan account is on the verge of becoming an NPA?
If you are unable to pay the loan repayment for 90 days, the bank marks it as an NPA. So, if you have a genuine financial problem, such as job loss or serious health issue, you may immediately contact the bank to get relaxation.
Adhil Shetty, CEO, BankBazaar.com suggests the following measures to deal with loans that are on the verge of becoming an NPA.
Step 1: Pre-emptive steps you can take:
- You can take a loan protection policy at the start of loan term. It may cover you or your family in certain situations. For example, in case of the borrower’s death, the policy will settle the loan balance, keeping the borrower’s family protected from financial harm. Such a policy may also provide EMI protection for a fixed number of months in case you lose your job in predefined conditions.
- You must also build an emergency fund that can cover your EMI payments – for six to 12 months at least, or more if you think it is necessary.
Step 2: Raise funds for short term and find a way to keep paying the EMIs.
- Liquidate short-term savings such as fixed deposits.
- Next, look at your long-term investments like PPF, endowment plans, EPF, mutual funds, stocks, etc. Start with the investments performing the worst and leave your best performers for the last.
- Once these are exhausted, consider liquidating personal assets, such as jewellery, gadgets, vehicles, or anything that may help raise cash.
- At last, consider asking friends and family members for an interest-free loan to help you.
“These short-term measures could help you tide over until you get back to being able to pay your EMIs normally. If your financial problems persist, consider selling off the asset for which you’ve taken the loan,” adds Shetty.
Borrowers can always get in touch with their lenders if they are finding it difficult to repay the loan EMIs. Depending on the eligibility of the borrower, the bank may allow extension in tenure so that EMI size is reduced or restructuring the loan in a way that repayment becomes easier.
Actions that can save you from loan default
Experts suggest that if you are struggling with the EMI amount, you may consider reducing your monthly outgo. You can request the lender to relax the terms and conditions of the loan. This may lead to reduction of charges, lowering interest rates, increasing the loan tenure, moratorium on interest, etc.
You can approach the bank with a request to increase the tenure so that the EMI size comes down. Note that increasing the tenure will also increase your total interest payment on the loan. So, if you are increasing the repayment tenure, you should be prepared to prepay the loan in future when your financial condition gets better.
