What Happens To Your Home Loan During Income Disruption

Payment of home loan equated monthly instalment (EMI) on a regular basis becomes tough when your income is hit. Whether it’s because of sudden loss of a job, cut in salary, or delayed joining of a new job, any interruption in income can affect your capacity for timely repayment. Most borrowers are confused as to what needs to be done or what banks want at this time.

Let us look at the most important implications of missing EMIs, the assistance you can seek, and the measures that could save you from long-term financial issues.

What if You Miss an EMI?

If you are late for one EMI, all banks permit a minimal grace period of a few days to settle the payment without a penalty. But if the delay is prolonged, the bank might charge late payment charges. More seriously, your missed payment will be also reported to credit bureaus, such as Cibil, thus affecting your credit score and chances of future loan approvals.

If the default persists for more than three months, banks will likely declare your loan as a non-performing asset (NPA) and will even initiate recovery proceedings, including sending legal notices or even taking possession of properties in extreme scenarios. This makes it necessary to inform the bank promptly and ask for an additional grace period or reschedule the loan by reducing the EMI and extending the tenure if you anticipate any disruption in income which is likely to affect your repayment capacity.

Can You Approach the Bank for Assistance?

Yes, you can, but you should go to the bank before the situation deteriorates. Lenders are generally more helpful if you tell them beforehand. Banks can also provide temporary relief in terms of:

• Granting you a moratorium for a couple of months when you don’t need to repay EMIs.

• Reduce your EMI for some time and ask you to pay more in the future.

• Extend the loan period so that your monthly EMI is reduced. 

These alternatives are based on your repayment record and the reasons why your income has decline or has been disrupted. You will have to provide evidence, such as a layoff notice or salary receipts to substantiate your claim for a moratorium. Banks will consider your situation before granting any alteration.

Since the Covid-19 pandemic, banks have been more willing to grant short-term relief. Nevertheless, such restructuring might impact your credit record if not managed properly.

Are Home Loan Insurance Policies Useful?

Certain borrowers opt for a home loan protection plan while taking a loan. Such plans may cover EMIs for a couple of months in case you lose your job, fall ill, or, unfortunately, pass away. But job loss is not covered in all policies, and even if it is, there are terms and conditions. For instance, the insurance will not be applicable if you quit your job voluntarily or are terminated for misconduct.

If you are not sure if you have this cover, refer to your loan papers or contact the bank. If you have such as cover, report a claim as soon as you lose your job. Even if the policy covers a couple of EMIs, it may provide you with a window of respite while you hunt for a job or sort out your finances.

What to do While Changing Jobs?

Income differences while changing jobs are inevitable. There are times when the notice period takes long, or the joining date is postponed. In such situations, keep your EMI account funded to make at least one or two future payments.

Even a short delay in salary credit can cause your EMI to bounce, leading to charges and credit score damage. If you know your income will be delayed, inform the bank and try to pay the EMI manually or from savings.

Using Savings and Emergency Funds

If you have a fixed deposit or an emergency fund, this is the time to utilise them. Your home loan is a secured loan, and defaulting on payments can land you in trouble. So, it’s preferable to utilise your savings and remain regular with EMIs rather than incur penalties or legal proceedings for missing EMIs.

Some individuals also dispose of gold or other minor investments to tide over for a couple of months. If you expect to regain your income shortly, such temporary measures can allow you to avoid default.

Can You Sell or Rent Your Property?

If your financial situation seems grim in the future, renting out the property can be a good option. The rent would not pay off the entire EMI, but would help with a part of it. If nothing else works, selling the property is better than handing over the property to the bank. Banks never take immediate legal action. As such, you can try to sell the property and return the loan to save your credit history.

Plan and Don’t Panic

Income interruptions are stressful and missing your EMIs at that time will only add to the stress. Discuss your situation with your bank, manage your savings well, and know how you can tide over the situation. Home loans are decade long, and an intermittent hiccup will not become a long-term financial crisis if managed well.

Maintaining good communication with your lender, understanding your rights, and planning will enable you to meet your home loan properly during such times of crisis.