Does the SBI home loan restructuring scheme work for you?

One of my old colleagues, who is working with reduced salary due to Covid-19, called me to understand whether he should avail the loan moratorium scheme as announced by the State Bank of India (SBI).

This article is based on the discussion I had with him about advisability or otherwise of opting for the moratorium scheme available for the home loan borrowers of SBI.

Basic features of the SBI scheme

SBI has announced that its home loan borrowers can opt for the moratorium for payment of their EMIs for a period up to two years. As the saying goes, no lunch is free, this option also comes at a cost. In case you opt for the scheme, your interest rate will get increased by 35 basis points from the date of moratorium. For example, if your home loan is presently running at 8% p.a., the interest rate will be 8.35% in the future. In case the loan is under the floating rate, the difference between the benchmark rate and your home loan rate will be maintained in the future. So, at any given point of time you will be paying interest higher by 35 basis points.

As announced by the RBI, the option of moratorium is available only to those whose income has been impacted by Covid-19. So, it is for salaried people who have either lost their job or are working at reduced salaries and those self employed people whose business has suffered due to the pandemic. The bank will ask you for documents to establish the fact of you being impacted. The option can only be availed if your home loan EMI was not overdue by more than 30 days on 31st March, 2020. So, in case your account had already become an NPA, you can not avail this option.

How the future EMIs shall be calculated

The lenders, generally, give loan for a tenure so as to ensure that the loan gets fully paid either before or by the time you retire, which is generally 60 years of age. In case of self employed, the age for retirement is taken higher at 65 years. However, in case of the SBI scheme, the tenure can get extended till 77, which is beyond my comprehension, as how can a person will service it after he has stopped earning or working? Since SBI is allowing the tenure to get extended till 77 years of age, the SBI does not intend to enhance the amount of your EMI to offset increased liability but will instead extend your tenure.

Overall monetary impact if you opt for it

In order to understand the monetary impact for the borrower who has opted for the scheme, I have taken a hypothetical example for a person who had taken a 20-year home loan of Rs 30 lakh at a fixed rate of 8% ten years ago. The present outstanding of the loan after 10 years is Rs 20.68 lakh. If he does not opt for the moratorium, his future interest payments will be Rs 9.43 lakh in the next ten years. However, if he opts for the moratorium and does not make any extra payment, the overall interest outgo will almost double, i.e. Rs 20,25 lakh. His tenure will get extended by around 5 years and 6 months.

What should you do?

Looking at the above numbers it looks like the choices are between devil and the deep sea. So, opt for it if and only you are sure that your situation will not improve soon and instead of losing your house, paying extra amount of interest will make sense. However, if you feel that you can either repay your home loan fully by liquidating your assets or will be able to manage the EMIs even if with difficulty, then you should not opt for it. It is not a question of payment of higher interest for just two years, but the penalty of higher interest will also continue for whole of the balance tenure.

In you have no option but to opt for it, you should pay up the EMIs regularly so that your credit history is maintained. You should pay additional amounts as and when you have surplus available so as to reduce the overall impact. Moreover, you always have an option of shifting of your home loan in the future if any other lender is offering you a lower rate of interest.

After the above discussion my ex-colleague was convinced that he will liquidate part of his investments and not opt for the moratorium, but your case may be altogether different and you have to take a call accordingly.

(The writer is a tax and investment expert and is working as Chief Editor of ApnaPaisa. He can be reached at balwant.jain@apnapaisa.com)