On 27 March 2020, the RBI announced that all Indian financial institutions under its purview would offer a moratorium on loans. This applies to all EMI falling due between March 1, 2020, and May 31, 2020. The moratorium may extend for another three months.

What exactly is a moratorium?

A moratorium is a breather for borrowers. Due to prevailing uncertainty, the RBI has granted relief to borrowers on repaying EMI. Since businesses aren’t functioning at full capacity, individuals’ earnings are affected. If you do not have access to regular monthly income during this period, the RBI announcement offers comfort.

However, the moratorium comes with a cost. The interest will accrue in these three months. This interest must be paid afterwards by either extending the original tenor or increasing your EMI. So, if you have a stable monthly income, then we suggest that you do not opt for the moratorium.

Example:

Ram has taken a housing loan for 15 years entailing an EMI of Rs. 25,300. He has paid 60 monthly instalments till now. If he opts for the moratorium either his loan tenure will extend by 5 months or his EMI will increase to Rs. 25,900.

Switch to Repo Rate

Earlier, the home loan interest rate was linked to MCLR (Marginal cost of lending rate). With MCLR linked rates, it took a while before end consumers could reap the benefits of a rate cut. However, now RBI mandates interest rates to be linked to the Repo rate. This benefits the end consumer. Macro-level rate cuts are immediately passed on to a home loan borrower.

Repo Rate Linked Lending Rate (RLLR) = Repo rate + Margin charged by the bank. Financial institutions can also charge an extra margin for risk based on the credit score or profile of the customer.

What should you do?

Talk to your banker and your financial planner. Your banker can clarify how this switch from MCLR to RLLR works and the associated costs. Your financial planner will assess how much interest you save with a smart decision. Remember, a lower EMI means less stress!

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