The home loan moratorium extracts more from you

By Morningstar |  25-05-20 | 
 

If there is one term that has become recurrent in our discourse, it is the word Moratorium.

What does it really mean?

It is a legally authorized period to delay payment of money due. Basically, postponement of the required periodic payment, such as rent or repayment towards a loan. It is temporary and enacted during emergencies or unusual circumstances.

ASEEM DHRU, Managing Director and Chief Executive Officer of SBFC Finance decided to clear the air on it and has written a brief note to that effect.

My grouse with the word moratorium stems from the fact that it is a Latin word that bankers instantly comprehend, but leaves ordinary folk confounded. How would you translate that into regional languages across India? Leave aside regional languages, even in English the term is not self-explanatory.

Consequently, people are mis-interpreting the term as maafi or waiver.

Let me explain.

As individuals flounder with the devastating impact of the epidemic and its subsequent lockdown, the Reserve Bank of India permitted a 3-month moratorium on home loans up to May 31, 2020. That date has now been extended to August 31, 2020. The total moratorium period is now six months.

If you have a Rs 15 lakh home loan outstanding for 20 years @9.5% p.a., your Equated Monthly Instalment (EMI) is roughly Rs 14,000 per month. If you do not pay for 6 months, you save Rs 84,000, but your loan tenure will go up by 4 years and you will end up paying an additional interest of Rs 5.7 lakhs! You read that right.

Let us work it out based on the assumption that the EMI shall be kept constant, and no EMI has been paid till date.

If you pay regularly…

  • Principal Outstanding = Rs 15 lakh
  • Interest per annum = 9.5%
  • Tenure = 240 months (20 years)
  • EMI pending = 240 months
  • EMI amount = Rs 13,982
  • Interest paid = Rs 18,55,672
  • Total amount paid = Rs 33,55,672

If you avail of the moratorium…

  • Interest per annum = 9.5%
  • Moratorium = 6 months
  • New Tenure = 281 months + 6 months = 287 months
  • Tenure extension = 47 months
  • EMI amount = Rs 13,974
  • Interest paid = Rs 24,26,820
  • Total amount paid = Rs 39,26,820
  • Interest difference = Rs 5,71,148
  • Principal outstanding = Rs 15,72,675

The good

The loan moratorium will provide relief to those facing a bump in cash flows. This will be of great assistance to those who are self-employed and have suffered a major jolt to their business. As well as to those who have been asked to work on “Leave without pay” or opt for a salary cut for a few months.

The deferment of loan repayments will not incur any penalty. Neither will it impact your credit score.

The bad

There is NO free lunch.

The EMI of six months gets added to the principal outstanding and then it is amortized. Since interest cost will be levied on the outstanding loan amount during the moratorium period, it will increase the overall interest cost.

The options

Once you realise that the moratorium resembles a second loan, you will be able to make a sound decision.

Here are 3 options: Keep tenure the same so that the EMI goes up. Keep the EMI the same so that the tenure will go up (the above calculation). Prepay the 6 EMIs at end of moratorium to keep tenure and EMI constant.

The lesson

Make compounding your ally, never your enemy.

The moratorium is a financial Covid, to draw from a familiar analogy. Do your utmost best to maintain a social distance from it.

If you have an emergency fund to help you tide through, or are fortunate to have sufficient liquidity, stick to your original repayment schedule.

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SARAVANA SAMBANDAM
May 26 2020 07:30 AM
 The Analysis is Completely WRONG. A Home Moratorium period of 6 Months means that ONLY 6 Months Interest which we are not going to pay will be added to the Principal and the calculation is:

NEW TENURE = 246 Months
NEW PRINCIPAL = Rs. 15 Lakhs + INTEREST of 6 Months (11875 + 11858 + 11842 + 11835 + 11807 + 11790) = Rs. 15 Lakhs + Rs. 70997 = Rs. 15,70,997
EMI AMOUNT After 6 MONTHS = Rs. 14644
TOTAL INTEREST PAID for 15 YEARS 6 MONTHS = Rs. 19,43,500
TOTAL PRINCIPAL PAID for 15 YEARS 6 MONTHS = Rs. 15,70,997
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TOTAL LOAN AMOUNT PAID with MORATORIUM = RS. 35,14,497
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TOTAL LOAN AMOUNT PAID without MORATORIUM = Rs. 33,55,672

INTEREST DIFFERENCE of LOAN with/without MORATORIUM = Rs. 1,58,825

Yes, there is an additional amount of Rs. 1.58 Lakhs incurred on the Total LOAN Amount if one opts for MORATORIUM and NOT Rs. 5.71 Lakhs as Quoted.
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