Moratorium Period: A Breakdown of Meaning, Examples, & Importance

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22 JUNE, 2023

Navigating through the intricate world of finance can be both perplexing and challenging, particularly for individuals without a background in the field. Whether seeking a loan or opening a bank account, you'll encounter numerous unfamiliar terms and phrases that necessitate a quick search. These words are not typically part of everyday vocabulary for the average person lacking financial expertise.

Nevertheless, when entering into a financial agreement, particularly a substantial loan such as a mortgage, you must acquaint yourself with the pertinent financial terminology. The moratorium period is one specific term that proves valuable when applying for a home loan. This blog centers around the concept of the moratorium on home loans.

Moratorium Period in Home Loans

In simple terms, the moratorium period meaning in home loans is that it gives borrowers a break from making Equated Monthly Instalment (EMI) payments, commonly called an 'EMI holiday.' This period is particularly beneficial for individuals facing financial constraints or construction delays. In education loans, students can commence EMI payments after completing their courses, as they often lack a steady income during their university years.

Similarly, in the case of home loans, borrowers can opt for a moratorium period if included in the loan agreement. For under-construction properties, lenders typically offer a grace period of 18 months or one-month post-possession, while ready-to-move-in properties usually have a shorter grace period of one month. This provision allows borrowers to balance their finances, especially if they cannot afford the monthly home loan EMIs.

Overview Loan Moratorium

Regarding the moratorium period on your home loan, it's important to note that the terms and conditions can differ among lenders. To make an informed decision and avoid any confusion, it is recommended to seek out lenders that offer a substantial break during the initial years of the loan term. However, it's crucial to carefully compare home loan interest rates as some lenders may compensate for the loan moratorium extension by increasing the interest rate once the holiday period concludes.

Once you have chosen a lender, let's discuss your specific requirements with them and clarify all the associated charges and procedures in advance. This proactive approach will ensure you secure favorable repayment terms throughout the loan term, even after the EMI break.

Moratorium Period News and Updates in 2023

The Reserve Bank of India has not announced any further extension of the home loan moratorium period in 2023 to provide relief to borrowers impacted by COVID-19. While there are demands for targeted relief for specific stressed sectors, no economy-wide suspension is expected. Instead, the government and RBI promote credit growth through other measures to revive the economy. Hence, no significant changes are forecast for the moratorium period this year.

Moratorium Period vs Grace Period

Grace Period:

It is the time between the end of a credit card billing cycle and the due date for payment.
No interest is charged on the balance if paid in full during the grace period.
Lenders usually offer a grace period of around 21 to 25 days, as the law requires.
If you carry a balance from the previous month, you lose the grace period and immediately accrue interest on new purchases.

Moratorium Period:

A moratorium period in home loan is a specific time frame when a lender allows you to stop making payments temporarily.
It is typically granted in cases of financial hardship or specific circumstances.
Unlike a grace period, interest may still be charged during the moratorium period.
The purpose of a moratorium period is to provide temporary relief and avoid default or non-payment.

A grace period is a shorter interest-free period between billing cycles for credit card payments. In comparison, a moratorium period is a more extended period during which payments are temporarily suspended, often due to financial hardship.

Conclusion

Understanding financial terms and concepts is crucial when navigating the world of finance. The loan moratorium is a vital aspect to consider, particularly in the context of home loans. It provides borrowers with a temporary break from making EMI payments, offering relief during financial constraints or construction delays.

However, it's essential to carefully review the terms and conditions offered by different lenders and consider the impact on mortgage interest rates after the moratorium period. Effective communication with lenders and proactive decision-making will ensure favorable repayment terms throughout the loan tenure.

FAQs About Moratorium Period

What is the duration of a typical moratorium period?

The duration of a bank loan moratorium may differ based on each person's circumstances and is mutually determined by the lender and borrower. Typically, moratoriums can span from several months to if a year and even several years in some cases, tending to lean towards the longer end of the spectrum.

Are there any penalties or additional fees associated with availing a moratorium period?

Yes, opting for a moratorium on your loan repayment may increase interest charges over time.

Is it mandatory to provide documentation to avail yourself of a home loan moratorium?

No, banks and housing finance companies had voluntarily announced the moratorium on loan repayments as COVID relief in 2020 and 2021. Borrowers could opt for the suspension simply by informing their lender. No additional documentation was mandated to avail of the moratorium.

Can I apply for a moratorium period on my existing home loan?

By utilising the home loan moratorium at the commencement of your home loan tenure, you can strategically restructure and manage your finances, enabling you to make regular monthly payments towards your home loan EMIs comfortably.

Can I opt for a moratorium period multiple times on the same loan?

Suppose a borrower has already availed a moratorium period of fewer than two years and has made regular repayments. In that case, they can apply for an extension of the moratorium so that the total moratorium period, including the latest one, adds up to a maximum of two years.

How does a loan moratorium extension impact the home loan repayments schedule?

Following the moratorium period, the repayment schedule for such loans and the remaining duration will be uniformly shifted by three months. It's important to note that interest will continue accumulating on the outstanding balance of the term loans during the moratorium period.