Moratorium Period: Meaning, Examples, Importance In Home Loan
Jan 04, 2024
In the domain of financial management, the concept of the ‘Moratorium Period’ holds paramount significance, particularly in the realm of home loans. This period represents a specified duration during which borrowers receive a reprieve from their regular loan repayments. It serves as a financial cushion, affording individuals the flexibility to navigate through challenging circumstances like job loss, economic downturns, or unforeseen emergencies without the immediate weight of loan obligations.
This article will delve into the moratorium period's nature, define moratorium, explore its pivotal role in providing financial relief, and delve into its advantages and disadvantages.
What is a Moratorium Period?
A moratorium period is a designated time frame, as per the Reserve Bank of India's directives, wherein borrowers are exempt from their loan EMI obligations. This period offers borrowers the option to defer repayment, granting a grace interval during which they can opt not to make EMI payments. Beyond its recent application as a relief measure in response to the COVID-19 pandemic, the moratorium period has been widely employed in various credit scenarios, such as education loans.
How Does a Moratorium Period Work?
Typically, the moratorium period commences immediately upon loan approval, primarily providing borrowers with an extended period to manage their finances and prepare for eventual repayments. Additionally, there exists a mid-loan moratorium phase, during which the lender authorizes the borrower to temporarily cease payments for specific reasons, such as financial hardships, over a predefined period. It's crucial to note that interest on the loan typically accumulates during this moratorium, underscoring the importance of understanding the financial implications associated with deferred payments.
What is the Moratorium Period in Home Loan?
The moratorium period in a home loan denotes a specific duration when the lender refrains from demanding any repayments. This respite is particularly beneficial when borrowers face financial constraints or difficulties, allowing them time to address their financial situation. During this interim, the lender acknowledges the borrower's challenges, granting a few months for resolution and life stabilization. Once the borrower's financial situation improves, they can resume prompt repayment, swiftly clearing the Equated Monthly Installments (EMIs).
Eligibility for a Loan Moratorium Period
The Eligibility for a Loan Moratorium period is as follows:
- During the onset of the COVID-19 pandemic, the RBI clarified that opting for the moratorium was a voluntary decision. Borrowers with outstanding loans and EMIs scheduled between March 1, 2020, and August 31, 2020, were eligible for this relief measure.
- Every time a moratorium is announced, whether by the RBI or banks, specific guidelines and eligibility criteria are meticulously established. These criteria for determining who can avail of the moratorium are subject to change, adapting to the evolving economic landscape.
- The eligibility criteria for a moratorium are dynamic and adjust to different economic challenges. The RBI may implement a moratorium, extending eligibility to borrowers in the face of natural disasters, economic crises, wars, or even terrorist attacks.
- It's important to note that a moratorium is not a mandatory provision for banks or an inherent right for customers. Rather, it's solely at the lender's discretion, emphasizing that offering a moratorium is a decision made by the financial institution based on prevailing circumstances.
How is Interest Calculated on a Loan During a Moratorium Period?
- During the moratorium, the lender calculates interest using simple interest based on the actual loan amount disbursed, not the total.
- After interest accrual, the principal and moratorium interest combine. As the moratorium concludes, you resume paying EMIs, encompassing both principal and accrued interest.
- This ensures a holistic repayment approach, covering both the borrowed amount and interest accumulated during the temporary relief period.
Benefits of the Moratorium Period in a Loan
There are many benefits to the Moratorium Period on a loan since accepting a moratorium on a loan offers borrowers several key advantages, such as:
1. A Better Repayment Strategy
Choosing a moratorium assists borrowers in crafting a stress-free repayment plan. It enables them to gather funds from various sources and initiate systematic repayments, avoiding the need to deplete assets for loan settlement.
2. Helps During Financial Crises
In the wake of events like the COVID-19 outbreak, a loan moratorium becomes a valuable tool. It proved beneficial for many facing job losses, pay cuts, or bereavement, providing a financial breather during challenging times.
3. No Negative Impact on Credit Score
Importantly, opting for a loan moratorium does not adversely affect a borrower's credit score or impact creditworthiness. This ensures that borrowing capacity remains unaffected.
Disadvantages of the Moratorium Period in a Loan
There may be a few disadvantages of the Moratorium Period in a Loan, which could result in a burden to the involved parties, such as:
1. Loan Tenure Increased
The automatic extension of the loan tenure during a moratorium can impact long-term financial goals and hinder investment plans, altering the original repayment timeline.
2. No Interest Waiver
A loan moratorium is one that doesn't waive repayment but merely defers it. This means accruing interest obligations, potentially leading to increased overall interest costs and adding strain to future payments.
3. Sudden Burden
While a temporary break from debt repayment offers immediate relief, the accumulating interest will eventually resurface. Without careful planning, the sudden pressure of substantial payments can disrupt monthly budgets and strain cash flow unexpectedly.
Formula and Calculation of Moratorium period
To calculate the moratorium period, the formula used is
Interest = balance * (1 + r)i - balance
Here,
- balance represents the opening balance at the moratorium's start
- r is the monthly interest rate
- i denotes the number of moratorium periods.
Utilizing this formula allows you to determine the interest accrued during the moratorium, providing insight into the financial impact of deferring payments. This calculation aids borrowers in understanding the additional costs associated with the moratorium period on their loan.
How does a moratorium period affect your EMI?
A moratorium period doesn't exempt you from paying EMIs; it defers payments to a later date. It's crucial to note that the moratorium is not a waiver, and the unpaid EMIs get added to the principal amount. This deferred repayment structure means you not only have to fulfill the original EMI commitments but also cover the accumulated amounts, potentially affecting your monthly budget and financial planning. Borrowers need to anticipate and prepare for the increased repayment obligations during the moratorium period.
How to avail of a moratorium on your home loan?
The terms for a home loan moratorium can vary among lenders, making it crucial to choose wisely. Opt for lenders offering favorable breaks in the initial years of the loan tenure. However, it's important to be vigilant in comparing home loan interest rates, as some lenders might raise rates on the moratorium to compensate for the break. Once you've selected a lender, discuss your needs and clarify all charges and procedures in advance for smooth repayment throughout the tenor, even after the EMI break. Additionally, consider allowing lower EMIs initially, adjusting repayments as needed, and gradually increasing them when your income rises.
What is the Grace Period?
A grace period, integral to loans and insurance, offers borrowers and policyholders a timeframe after the due date during which no late fees or penalties are imposed. This grace period typically spans from the day after the due date until its conclusion. While the borrower is not obliged to make the payment during this period, interest may continue to accrue. The grace period acts as a buffer, allowing delayed payments without immediate consequences. However, if the payment remains outstanding beyond this period, lenders or insurers may enforce late fees or penalties, emphasizing the importance of settling obligations within the designated grace period to avoid additional charges.
Differences Between the Moratorium Period and Grace Period
| Moratorium Period |
Grace Period |
| A moratorium period refers to when a borrower stops making payments for a certain duration. This is agreed upon by them and their lender. |
A grace period refers to the duration when the borrower repays the due payment without a penalty. |
| The moratorium period is longer than the grace period. |
The grace period is offered to all customers automatically. |
| Interest may be charged. |
Interest is not charged during the grace period. |
| A moratorium period is similar to a forbearance or a deferment. |
According to the law, they must send a bill at least 21 days before the due date. |
Conclusion
In conclusion, a moratorium period serves as a temporary respite, offering short-term relief from loan repayments amid financial hardships for specific family or lifestyle occasions, such as covering education fees, maternity leave, or undertaking home property improvements. Importantly, opting for a moratorium does not alleviate the interest burden during the moratorium period. Making an informed decision regarding the necessity of a moratorium ensures borrowers understand the implications of interest accrual and aids in maintaining a sustainable and responsible approach to loan repayment.
In your pursuit of responsible and sustainable loan repayment, SMFG Grihashakti stands as a reliable partner. With our commitment to transparent processes, competitive interest rates, flexible repayment terms, and customer-centric solutions, we offer you the support needed to navigate your homeownership journey seamlessly.
FAQ's
Are only home loans eligible for moratorium?
Although home loan moratoriums are the most popular, they are not the only loans eligible for a moratorium. Depending on economic conditions or unforeseen circumstances, lenders, including banks and financial institutions, may offer moratorium options for various types of loans, such as personal loans, auto loans, and education loans, to provide temporary relief to borrowers facing financial difficulties.
Read More : 8 Different Type of Home Loans Available in India
What is the maximum period of moratorium?
The duration of a loan moratorium is negotiated between the lender and borrower, typically ranging from a few months to a maximum of two years. While they tend to be longer-term solutions, an overall cap restricts the extension of the residual tenor, inclusive of any moratorium, to a maximum of two years.
Is the grace period the same as the moratorium period?
The grace period provides a brief respite after a due date, exempting borrowers from immediate penalties. In contrast, a moratorium is a more extended pause in loan repayments, granted during financial challenges. Although both involve deferred payments, their durations, purposes and impacts on repayment obligations differ significantly.
Is the interest waived off during the moratorium period?
The moratorium aimed to offer borrowers relief amid the COVID-19 pandemic, allowing the deferment of EMI payments. In October 2020, the central government announced a waiver of compound interest on specific loans during the moratorium. However, in general, interest is not waived off, and borrowers are still required to pay the accrued interest along with the principal after the moratorium period concludes.
Do you have to pay for interest in the Moratorium period?
Yes, in most cases, borrowers are required to pay interest during the moratorium period. While the moratorium provides a temporary break from making regular loan repayments, interest continues to accrue on the outstanding loan amount. It's essential to understand that the moratorium does not waive interest; it defers the repayment of both principal and interest to a later date.
Is moratorium mandatory?
No, the moratorium period is not mandatory. Borrowers have the option to choose whether or not to avail themselves of the moratorium offered by lenders. It is a voluntary measure that provides temporary relief from loan repayments, allowing borrowers to navigate financial challenges without immediate payment obligations.
How many months is a moratorium period?
In the context of loan moratoriums, it can range from a few months to up to a year or more, depending on the specific terms negotiated between the parties. The length of the moratorium period is subject to the policies of the lending institution and the prevailing economic conditions or circumstances that warrant such relief.
Can we cancel the moratorium period?
Yes, in many cases, borrowers have the flexibility to cancel or opt out of a moratorium period if they initially choose to avail of it but later decide to resume making regular loan repayments. It's advisable to communicate with the lender and understand the specific procedures and conditions for opting out of the moratorium to ensure a smooth transition back to regular repayment schedules.
What happens after the moratorium period?
After the moratorium period concludes, the loan's principal amount and any accrued interest are consolidated. Subsequently, borrowers are required to resume making payments on their Equated Monthly Installments (EMIs). The accrued interest during the moratorium becomes part of the overall amount due, and borrowers must commence regular repayments to cover both the principal and the interest accrued during the EMI holiday.
Is the moratorium period good or bad?
The moratorium period has both advantages and drawbacks. While it provides short-term financial relief and flexibility, the accrual of interest and potential extension of the loan tenure can pose challenges. Borrowers should carefully evaluate their circumstances and weigh the implications before opting for a moratorium.
Disclaimer: *Please note that this article is for your knowledge only. Loans are disbursed at the sole discretion of SMFG Grihashakti. Final approval, loan terms, disbursal process, foreclosure charges and foreclosure process will be subject to SMFG Grihashakti’s policy at the time of loan application. If you wish to know more about our products and services, please contact us.