A big public sector bank just started offering home loans with a three- to five-year grace period. In That time duration, customers can choose to pay only the interest during the moratorium. After that, their EMIs go up slowly over the next few years. This is supposed to make it easier for customers, especially young professionals, to pay back their debts. Now, we'll have to wait and see if other banks offer loans with similar features.

But if the borrower can handle his EMI from the start, he shouldn't choose a moratorium, even if it sounds like a good idea.

Moratorium and Money Borrowers

The idea of putting a hold on loans is not new. Education loan companies have been giving students this benefit to give them time to find a job so they can start paying back their loans.

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In the past few years, things have been tough in the real estate market. Even though there have been occasional upswings in the economy as a whole, the industry is still waiting for a comeback. So, a home loan with an EMI moratorium would help people who have been waiting for their income to go up or for the economy to get better.

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What is a moratorium?

A moratorium means to stop or put off doing something. When it comes to bank loans, amoratorium could mean that you don't have to pay EMIs in full or in part.

During the first type of moratorium, no payments are made. In the second, which is more common, the borrower only pays the interest during the moratorium. As agreed with the lender, the borrower will have to start paying back the full amount of the loan after the moratorium.

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Pros and cons

Let's look at the pros of a moratorium, especially the first kind where you don't have to pay anything. This is preferred by borrowers who are having trouble paying their EMIs for a short time but think their finances will get better soon.

For example, the borrower may have had an unexpected expense or lost his job, which kept him from paying back his loan for a short time. Putting a hold on his loan would help him a lot.

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It also gives borrowers time to figure out how to handle their money and plan for the next few years while the loan is in effect. Also, the interest paid during the moratorium is less than the interest rate that was used to get the loan in the first place. As much as 1 percent can be different.

Borrowers may also be able to get a bigger home loan through this scheme than they would through a regular loan. It lets potential home buyers dream of a bigger budget for buying a home without having to worry about the downsides of paying a bigger EMI right away. This is thanks to the moratorium and the gradual stepping up of EMIs, which goes well with a gradual increase in the home owner's income. But there are also some problems with the plan.

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First, most of the time, the financial lending institution will only agree to a moratorium on the amount of the principal. The person who takes out a loan has to pay interest as soon as the loan is given to them. At the beginning of your repayment period, the interest part of your EMI is a lot bigger than the principal part. Because of this, the borrower doesn't really have much to save.

For example, if you borrow R30 lakh over 20 years at a rate of 10%, your EMI will be R28,951, or R202,655 per year. After one year of payments, only R28,356 of your principal would have been paid off, while R174,299, or 86% of your payments, would have gone toward interest. Because of this, the amount you would save on principal payments would be small.

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Also, after the moratorium period is over, the amount of the EMI will be higher. This is true even though they didn't save much in the first few years of paying interest. For example, let's say a person took out a Rs. 25 lakh home loan for 20 years with a two-year break. During these two years, the person who borrowed the money should only pay the interest. After the moratorium is over, the borrower has 18 years to pay back the EMI. Since the time it takes to pay off the loan has gotten shorter, the EMI will be much higher.

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What should borrowers do?

A home loan with a moratorium is a good choice if you are short on cash but think it will be gone in a few months or years. Just like with an education loan, there must be a moratorium because not all borrowers may be able to pay back right away. But if you only want to save money and feel better temporarily, this is not the right choice.

At the same time, the borrower shouldn't choose a moratorium if they can pay their EMIs from the start, even if the offers sound good. When loans aren't paid off quickly, interest keeps being added to the principal, which makes the outflow go up.

Lastly, if you really want to use a home loan with a moratorium, you should make a decision based on three things: the length of the moratorium, the interest rate during the moratorium, and the EMI you'll have to pay after the moratorium.

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