When it comes to managing your home loan, understanding the differences between refinancing and restructuring is crucial. Home loans are high-ticket-loan items and equated monthly instalments (EMIs) on such loans are likely to be a large chunk of most household’s monthly income. Servicing such debt could get challenging for a family over the long tenure of such loans. In such circumstances, what are the options before the home loan borrowers.
Loan refinancing
It involves replacing your existing home loan with a new one. Essentially, you take out a fresh loan to pay off the original one. The process starts with one applying for a new loan with better terms (such as lower interest rates or extended tenure). The new loan pays off the outstanding balance of your old loan. Subsequently, you start making payments on the new loan. Also, there may be processing fees as you are applying for a new loan.
When to opt for it
Determining the right time to refinance requires careful consideration of various factors. Here are some key indicators.
Reduced interest rates: If market interest rates have significantly decreased since the time you secured your original loan, refinancing could allow you to benefit from a lower interest rate.
Improved credit score: If your credit score has improved since the time you initially obtained the loan, you may qualify for more favourable terms.
Change in financial situation: A positive change in your financial situation, such as an increase in income or reduction in debt, could make you eligible for better loan terms.
Current loan has high monthly payments: If you’re struggling with high monthly payments, refinancing with a loan that has a lower interest rate or an extended term can provide relief.
Debt consolidation: Switching towards a home loan that can provide a top-up or additional funds is also a good option, especially to close multiple high-interest-rate debts.
Loan restructuring
Home loan restructuring is the last-resort option as it is opted for when the borrower is no longer in a position to meet debt repayments on current terms.
It is a process that allows borrowers to modify the terms of their existing loan to manage their repayment more effectively. This is often an option given to borrowers facing financial difficulties. Here are some key points to keep in mind when it comes to restructuring of the loan.
Purpose: The primary purpose of loan restructuring is to help borrowers manage the repayment of loan principal and interest due. It is often used to avoid the risk of default on existing loans.
Modes: Loan restructuring can be achieved through various methods such as extending the repayment period, changing the repayable amount, altering the number of instalments, adjusting the rate of interest, or providing additional loans.
Contingencies: The Reserve Bank of India had set rules and regulations for loan restructuring, especially during the covid pandemic, to help borrowers who may be unable to repay loans due to the pandemic.
Eligibility: The eligibility criteria to avail loan restructuring would vary depending on your repayment ability, loan amount availed, etc. Different lenders can impose different eligibility criteria. For example, during the pandemic, restructuring was given to the sectors and segments most impacted, viz. retail, hospitality, travel, etc.
Loan restructuring is meant to give certain leeway to stressed borrowers. However, the credit score of borrowers is likely to get negatively affected when they restructure a loan. It is advisable to keep your lender in the loop if you are finding it difficult to meet your loan obligations on time or if your financial stability has been compromised.
Akriti Singh is chief alliances officer at India Mortgage Guarantee Corporation.
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