Moratorium Periods: Pros, Cons, and What You Need to Know

The world of home loans can seem quite overwhelming and complex. You may have to comply with a wide range of formalities as well as comprehend technical terms. One such term is ‘moratorium period.’ It is an important concept that can have a significant impact on both your home loan repayment schedule and your personal financial planning. 

If you are a first-time loan borrower and are unsure of this term or its benefits and drawbacks, this guide is for you. Read on!

 

What is a moratorium period?

As per the RBI (Reserve Bank of India) guidelines, the moratorium period for home loans refers to the specific time period during which you need not make any principal amount repayments. It is essentially a holiday period granted by financial organisations. However, it is important that during this period, the interest on the home loan continues to accrue, and you must repay the accrued interest and the principal amount after the moratorium period ends. 

 

Purpose of a moratorium period

The main purpose of a home loan moratorium period is to help you get financial relief from monthly EMI (equated monthly instalment) payments during significant life events like job loss, accident, etc., that may limit your ability to make the monthly payments. It essentially gives you time to stabilise your finances without the pressure of EMIs.

 

Benefits and Drawbacks of a moratorium period

While most financial organisations have moratorium facilities, opting for one is voluntary and based on your changing financial situation. There has been a long-standing debate about whether the mortarium provides a financial breather or is a hidden financial trap. So, let us look at its pros and cons.

 

Pros

• Provides immediate financial relief

One of the most significant benefits of the loan moratorium option is that it helps you get immediate relief from the financial burden of EMI payments. When you are facing any financial hardship or during a crisis, such as a job loss or a medical emergency in the family, it can provide breathing space to reallocate your finances where they are needed the most. 

 

• Maintain a good credit history intact

When you opt for the moratorium offered by the lender, you can be assured that your credit profile won't be affected even though you may miss your monthly EMI payments. Since the lender offers a deferment arrangement, the missed payments during the period are not reported, and you can maintain your impeccable credit history. 

 

• Better cash flow

Another important benefit of opting for a home loan moratorium period is that it allows better cash flow during a crisis. You can have the flexibility of managing the cash reserve efficiently and prioritise essential expenses without worrying about repaying the loan. 

 

Cons

• Interest accumulation

While the moratorium period may give you the flexibility of not paying the principal amount of the EMI, the interest still accrues. That means your total interest payment over the loan tenure would be high. As a borrower, you must consider the impact of the increased cost against the immediate financial relief. 

 

• Increased loan tenure

Since the lender gives you the freedom to avoid making the monthly EMI payments for a specific period, they extend the loan's tenure so that you can make paused payments later. The extended tenure means you will be in debt for longer, which may also affect your other future financial commitments. 

 

How to avail of the moratorium?

Before you approach the lender to request a moratorium, it is advisable to first check your loan agreement to see if there is a moratorium clause in it. Then, contact your lender to discuss your needs, understand the terms and conditions, charges involved, etc., and opt for it. 

Remember, different lenders have different terms for the moratorium period. So, make sure that you are clear about the repayment terms and submit a written request for it. Once the lender reviews your request, they will approve or disapprove it and inform you about it.  

 

Should you opt for the moratorium or not

It is quite evident that the moratorium period in a home loan is like a double-edged sword. While it gives you an immediate respite from monthly EMI payments, it can also lead to a higher interest burden in the long run. So, the decision about opting for or not opting for the moratorium must be made based on your personal financial condition. 

If you are facing a financial crunch, you can opt for the moratorium. But, if you have the financial ability to continue making the EMI payments, then it is better to avoid opting for the moratorium period and avoid paying higher interest.