How to manage home loan EMI under financial distress

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Why are home loans so important? Of all the loans that a person takes in a lifetime, no loan is perhaps more important than a housing loan. This is due to several reasons.

# Home loans are typically high-ticket loans compared to personal loans and car loans: A typical personal loan is about 10 times a person’s monthly income while a home loan could be more than 30 times a person’s net monthly income.

# Home loans are longer-duration loans: A typical personal loan is for a duration of 3/5 years while home loans could even be for 30 years or more.

# The interest outgo on a home loan could run into tens of lakhs of rupees owing to the high ticket sizes and longer tenures.

# Homes have a sentimental value for Indian borrowers which attaches a special significance to home loans.

Home loan defaults are increasing

According to a recent TransUnion report, home loan defaults have increased to 2.96% (account-wise) and 1.68% (value-wise). The property markets in India have been going through a prolonged slump. This, combined with the economic slowdown, has contributed to the increase in defaults. Also, a number of people, fuelled by the ever- increasing property prices, had purchased multiple properties over the last decade. These were speculative purchases rather than homes meant for end-use. As these people unwind their positions, property prices might fall further. This might cause more defaults as home values fall below the loan amounts.

Normally, lenders tend to lend only about 80% of the market value of the property while the 20% "own contribution" acts like a buffer against a fall in prices. However, several lenders have tended to over-estimate property prices and consequently the loans amounts have increased. Now, as property prices fall, lenders do not have enough of a buffer to cushion the shock. Also, given the current illiquidity in the residential property markets, lenders are unable to sell the collaterised properties and make good their losses further accentuating the problem.

How to service a home loan while under financial stress?

Under the current economic situation, people are not feeling very confident about their jobs. How does one deal with a home loan EMI under such circumstances?

The following pointers could come in handy:

# If you have multiple properties and home loans, consider reducing the leverage by selling one of your properties that you don't plan to stay in. Now, this might not be as easy given the current market situation, but a realistic price point could attract potential buyers. And indeed, it is better to live stress-free than worry about an EMI burden on a house that you are unlikely to use.

# Speak to the bank to see if they will reduce your loan EMI by increasing the loan duration. While this means that you will have to service your loan for longer, it allows you the flexibility to pay your revised EMI without worry.

# Maintain a contingency fund: It is prudent to maintain about 6 months of expenses as a contingency fund to cover any unexpected job losses, especially during bad economic cycles.

# Consider unemployment insurance: Unemployment insurance covers the EMIs on your home loan for a limited period of time should you lose your job. This is a useful risk mitigation tool that is not well known in the market, but is very useful during an economic crisis.

# Cut discretionary expenses: Home loan EMIs should be prioritised over other purchases such as expensive movies, luxury holidays etc. and could help you to match your income to your expenses.

(By Arun Ramamurthy, Industry Expert and Author of India’s first book on Credit Scores)