What happens when you delay paying your mortgage?

Buying a new home is like a dream come true for many of us. But that dream can turn into a nightmare if you delay your home loan repayments. A home loan is one of the cheapest and easiest ways to build up the fund for buying a residential property. There are a variety of home loan products available in the market today, and you can choose the one that best suits your needs.

Taking out a home loan can be like a walk in the park, but paying it off on time requires careful financial planning. EMI home loan repayment delays can impact the borrower in many ways. Here is a list of results and solutions for dealing with late repayments on your home loan.

Late penalty and NPA account

If you delay paying off your EMIs for three consecutive months, this is considered a minor default. In this case, the lender may start sending you payment reminders. But the problem begins when this delay extends. A delay of more than 3 months is considered a major defect. The lender can initiate the process of auctioning your property to recover rights under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Act 2002 (SARFAESI).

In delaying an EMI, the first action any lender normally takes is to impose a penalty which ranges from approximately 1% to 2% p.m. on the outstanding EMI and is subject to a prescribed minimum amount. In the event of a major default, the bank can mark your loan as NPA and subsequently initiate recovery proceedings. Usually, banks send a notice before marking a loan as NPA. Sometimes banks use third-party agents to collect their money from NPA accounts, which can also embarrass borrowers. That said, it is in the interests of both the lender and the borrower to find a way to repay the dues. Moreover, the borrower, even in default, must behave respectably. Any coercion or intimidation may be held against the lender. The NPA will have a cascading effect on the borrower’s relationship with the lender. If the borrower has used other loans from the same lender, these loans may also be labeled as NPA despite the timely repayment of the EMI against them.

Impact on credit score

Irregular EMI repayment of home loans has a negative impact on credit rating. If the borrower often misses the EMIs, it can cause the credit rating to drop to a very low level. Nowadays, most banks reset the interest rate on their loan at regular intervals by renewing the applicable interest rate based on the prevailing REPO rate and the risk premium calculated based on the credit rating of the borrower. Thus, a lower credit rating can lead to higher loan interest rates for unruly borrowers. In the event of a major default, the bank reports this account to the credit bureaus and the NPA is reflected in the borrower’s credit report. This can significantly damage the creditworthiness of borrowers and also decrease their future borrowing capacity.

Refusal of transfer and new loan

If you want to transfer your home loan to another bank or financial institution, the new lender may reject your application due to insufficient repayment history. These borrowers may also have difficulty obtaining a new loan in other categories such as personal loans, car loans, etc.

How to avoid late payment of home loan EMIs?

If you are facing a temporary cash flow problem, you can borrow money from friends or family to pay off IMEs. Another option is to take an OD (overdraft) against your FDs or life insurance policy to pay off the EMI loan. However, you must put money back into the OD or return the money to your friend/relative once your liquidity situation has stabilized and returned to normal.

But if you face an uncertain liquidity setback, you can liquidate some of your low interest rate investments such as FDs or liquid funds to repay EMIs on time. You may also consider withdrawing from your PF contribution or long-term investments such as the Public Provident Fund (PPF) to organize funds to avoid a home loan default.

If financial recovery seems impossible, you may consider taking serious financial steps such as selling your home and moving to a smaller home or rented property to save money, or you may consider selling your chattels such as gold, car, etc. to avoid payment default.

Additionally, you can purchase loan insurance to cover your IMEs for a short time. Some banks and financial institutions offer this loan insurance at the time of loan disbursement. This can be useful in the event of job loss or temporary loss of income when you are unable to pay your IMEs.

Create sufficient contingency funds to ensure adequate liquidity for timely payment of EMI loans in adverse financial situations. Planning before taking out a loan helps you avoid missing an IME. You can focus on things like taking out a loan based on your repayment capacity, you can take out the loan for a longer term to keep the EMI lower, and you can take advantage of the moratorium period before starting the IME payment to prepare yourself financially before the start of the IME. .

It is also advisable to keep in touch with your lender and find a solution. Depending on your case, the lender may offer you options such as loan restructuring, grace or moratorium period and loan settlement where the interest rate is reduced according to the rules to reduce your burden.

(The author is CEO, Bankbazaar.com)