When it comes to managing your home loan, understanding the differences between home loan refinancing and restructuring is crucial. Let’s delve into each option.
Home loan refinancing
This involves replacing your existing home loan with a new one. Essentially, you take a fresh loan from a different lender/bank to pay off the original one.
Process:
1. Apply for a new loan offering better terms (such as lower interest rates or extended tenure)
2. The new loan pays off the outstanding balance of your old loan
3. Start making EMI payments on the new loan.
When to refinance your home loan?
Determining the right time to refinance your existing home loan requires careful consideration of various factors. Here are some of these:
- Reduced interest rates: If market interest rates have significantly decreased since you took the original loan, refinancing could allow you to lock into a lower interest rate.
- Improved credit score: If your credit score has improved since you initially obtained the loan, you may qualify for more favorable terms and therefore a lower interest rate.
- Change in financial situation: A positive change in your financial situation, such as an increase in income or reduction in debt, could make you eligible for better loan terms.
- Higher EMIs due to a lower sanctioned tenure: many borrowers are given lower repayment tenures during the initial home loan sanction, mainly due to lender policies (or) lower credit scores. In this scenario, a refinance of the home loan can be done to another institution offering higher repayment periods, which helps bring down the EMI’s considerably
- Debt consolidation: Debt consolidation is a smart financial move that allows you to streamline multiple debts into a single, more manageable payment. For e.g. many borrowers have higher interest rate debts running (viz credit cards, personal loan etc.), and in this case to manage one’s finances better, a switchover of the current home loan to another institution offering additional amount/top-up (basis current property prices, income levels etc.) can be done. A home loan top-up is an additional loan amount that you can avail on top of your existing home loan. It allows you to borrow more money without the need for extensive documentation and is generally offered at slightly higher rates than a normal home loan but lower interest rate then credit cards, personal loans etc. Hence the borrower can save significantly on the interest payments on other types of loans such credit cards, personal loans etc.”
Please remember, it’s always a good idea to consult a financial advisor/banker before making any major decisions related to your home loan. They can provide personalised advice based on your specific financial situation.Home loan restructuring
Home loan restructuring is a process that allows borrowers to modify the terms of their existing loan to manage their EMIs more effectively. This is often an option given to borrowers facing financial difficulties. Here are some key points about home loan restructuring:
Purpose: The primary purpose of loan restructuring is to help borrowers better manage the repayment of loan principal and interest due. It’s often used to avoid the risk of default on existing loans.
Modes: Loan restructuring can be achieved through various methods such as extending the repayment period, changing the repayable amount, altering the number of installments, adjusting the rate of interest, or providing additional loans.
Contingencies: Home loan restructuring was offered by lenders primarily during the Covid-19 pandemic on directions of the RBI. The Reserve Bank of India (RBI) had set rules and regulations for loan restructuring during the COVID- 9 pandemic, to help borrowers who were unable to repay due to the pandemic. However, it depends upon each lender’s policy whether or not to offer the same during financial difficulties of a borrower.
For borrower defaults due to financial constraints (other than the pandemic), tenure extension with corresponding EMI reduction can be given. This, however, is very rare and subject to serviceable age norms of the borrower and other aspects like credit score and overall debts etc.
Eligibility: The eligibility criteria to avail loan restructuring vary depending on your repayment ability, loan amount availed, etc. Different lenders can set different eligibility criteria.
Loan refinancing vs loan restructuring
Having explained both, let’s clarify the differences between home loan financing (often referred to as home loan refinancing) and home loan restructuring.Home loan financing (loan refinancing):
- This involves taking out a new loan to pay off an existing one.
- The objective is to utilize better interest rates and terms.
- It doesn’t have to be due to the borrower’s financial distress.
- It’s often opted for if the new loan comes with better terms and interest rates.
Loan restructuring:
- This involves making changes to an existing loan so that the borrower is in a better position to meet the debt obligations.
- The objective is to avoid loan defaults.
- It’s often considered a last resort and used when borrowers face situations that affect their financial stability, like a lay-off, pandemic or a loss in the business.
- The credit score of the borrower gets negatively affected when they restructure a loan.
- It involves increasing the tenure of the loan to reduce the financial burden every month or even changing the frequency of interest payments.
In summary, the major difference between loan refinancing and loan restructuring is that loan refinancing involves the creation of a new loan account, while loan restructuring changes the terms of the existing loan account. Loan refinancing is generally done to get more favorable terms in the home loan but not due to financial distress, while loan restructuring is required in times of economic hardships.
Authored by Akriti Singh Chief Alliances Officer IMGC (India Mortgage Guarantee Corporations)
