The coronavirus pandemic has wreaked havoc on the economy of almost every country in the world and by extension, on the personal finances of almost every person, irrespective of their economic status. If you are reading this, you may most probably be a salaried or self-employed person from a middle-class or upper-middle class background. There may be job losses or pay cuts on the horizon or perhaps you have already experienced one or the other. For most people in this demographic, there is one expense that they might all have in common and that is a home loan.
Without a home loan, it is next to impossible to have a home of your own in India today. The rising costs of real estate have ensured that almost everyone, no matter what income bracket they fall into, has had to take a home loan to make their dream home a reality. However, when times are good, there would be no stress about paying your EMIs on time, whether you are a salaried or self-employed individual, whether you are the sole applicant on your loan or have co-applicants.
However, in times of a truly unprecedented economic crisis the likes of which we are seeing today, paying the EMIs of your home loan on time may be giving you nightmares. Even if you have a tidy sum saved up, you may not be able to afford to keep it aside just to pay off your home loan. There may be other expenses that call out to you, from your daily groceries to utility bills, children’s fees to credit card bills, salaries of your domestic help to insurance premiums that still have to be paid on time. So how do you ensure that your home loan EMIs continue to be paid on time even in the middle of a global pandemic that is turning the world upside down?
Here are some tips to make sure your home loan EMIs don’t’ suffer in times like these. These could be applicable whether you still have a steady income coming in or you have been hit by a salary cut or even been laid off from your job. These tips are general strategies to help everyone, no matter where they may be at this point in time, so take your pick and follow the ones that are most relevant to your financial situation:
1. Switch from MCLR to RLLR:
Home loans are linked to either the Marginal Cost of fund-based Lending Rate (MCLR) or Repo Linked Lending Rate (RLLR). From 1 October 2019, all new retail loans that have floating interest rates have been mandated by the Reserve Bank of India to link their home loans to an external benchmark rate.
It is up to the banks to choose whether to go with the MCLR or the RLLR. However, most banks have chosen to be linked to the external benchmark, the RLLR. Whenever the RBI slashes repo rates, there is a corresponding cut in the interest rates of home loans linked to the RLLR. This is because when the RBI slashes repo rates, banks are quick to pass on the benefits of that to the customers.
If your home loan was taken before September 2019, there is a high probability that it is linked to the MCLR still. For such loans, you do not get the benefit of any interest rate cuts when the RBI cuts repo rates. In the post-Covid-19 scenario, the RBI has been very generous in rate cuts, with home loan interest rates being revised almost every couple of weeks since the pandemic started. As per BankBazaar the lowest repo linked home loan interest rate starts at 6.75% and you might be missing out on all these benefits if your home loan is still linked to the MCLR
This is why switching to the RLLR makes sense, especially in a post-Covid situation. With floating interest rates, you should also be prepared for interest rates to go up in future, but for now, rates may go down. Also note that once you switch to an external benchmark, you cannot switch back to the MCLR regime.
You can save a lot of money when your EMIs get lower with each cut in basis points. Not only do your EMIs get smaller but your loan tenure also gets shorter. For example, a reduction of 35 basis points can bring your EMI on a 30-lakh home loan with an interest rate of 7.5% p.a. down by Rs.2.52 lakh per annum and a reduction in loan tenure by at least 10 months.
2. Choose an EMI moratorium
If your home loan is already linked to the RLLR, and you are in dire financial straits, then the next thing you can do is to make use of the EMI moratorium that was announced by the RBI. This is only for the months of March to May, however, and you will have to pay the interest accrued on the three months after the moratorium is over.
However, even though this will increase your EMIs after the moratorium is over, you can still choose to pay the same EMI as before but with a longer repayment tenure or a higher EMI with the same tenure. However, this will still give you a three-month holiday which you can use to save money or look for a job if you have been laid off.
3. Use your savings
The government has permitted withdrawal of 75% of your credit balance or 3 months of your basic and dearness allowance, whichever is lower, from your Employees’ Provident Fund account. This is non-refundable, however, and will substantially reduce the savings that you obtain when you retire. However, during a crisis such as this, it may be a worthwhile option to ensure that your home loan EMIs are not defaulted upon.
Other savings options that you could consider are your fixed deposits, recurring deposits, or, if you have been laid off, your severance package.
Make sure that your home loan EMIs are not delayed or defaulted upon during this crisis will hold you in good stead in future so do your best and hope for the best!