What is the Meaning of Moratorium Period in Home Loan?

While researching about home loans, you might have come across the term moratorium period. Home loan advisors often encourage the borrowers to discuss the conditions for the moratorium period before the sanction of loan. But what is it? Let's start with the basics.

Typically, once an individual receives a home loan amount , their tenure for loan repayment starts. The repayment of the loan is made through Equated Monthly Installments (EMIs). Moratorium period is the duration when a borrower does not have to make any payment to the lender. However, the borrower will still be liable to pay interest generated during this holiday tenure.

It's not rare that people confuse the moratorium period with being another name for the grace period. While both of these facilities are time-based and offer you time advantage in loan repayment, both serve fundamentally distinct purposes.

• Moratorium: In this, the lender does not ask you to repay the loan amount. The borrower can avail this facility at any time during the loan tenure. This means you can request a moratorium period before the start of repayment or even when you have paid a few EMI's. Usually, a borrower requests the lender for a moratorium when he faces financial crunches and needs to bring his finances back on track.
• Grace Period: On the other hand, the grace period as the name suggests, is a period of grace. This facility is usually availed when the deadline of the loan repayment arrives and a borrower does not have necessary funds to clear the loan amount. The lender can then sanction an extra time where the borrower can accumulate the required amount to be paid.

Let’s understand this difference with an example.Anuj avails a home loan . However, after the first 2 EMI's payment, Anuj suddenly has to invest a large amount of money in a medical emergency. With another 5 EMI's ahead of him, and barely enough money to support the daily expenses, Anuj can apply for a moratorium period. If granted, then Anuj will be relieved from making any repayments during the agreed tenure. On the contrary, the lender may give Anuj a 'grace period' after the loan tenure ends, with payment of EMI's still pending. He can then use this time to gather the required amount and then repay after the tenure ends.While both moratorium and grace period are sympathetic facilities, the interest rates are never charged during the grace period. A moratorium period always comes with interest accrual, which needs to be paid in addition to the agreed EMI amount.

• Moratorium period removes the stress of paying back EMI's, during the period where you can re-establish financial stability. This feature is excellent during any medical emergency, a big purchase or likewise circumstances.
• Often individuals take moratorium periods before the start of the loan repayment period. This gives them support to handle crucial time-sensitive costs that accompany home settlement like construction, rent payment of present accommodation, and others.
• Moratorium period does not impact the credit score of the borrower. Thus, it ensures that the borrower can easily procure another loan in future without a black spot in their credit history.

You can opt to pay back this interest amount in either of the following 3 ways:

1. During the Moratorium Period: You can pay back the interest generated during the moratorium period itself. So once the moratorium period ends, you can simply resume paying back the EMI's.
2. Clubbing the Amount with EMI's: Borrowers can club the interest amount by dividing it and clubbing with the pending EMI's. Once the moratorium period, the EMI's will be more than what you paid earlier since these will include the interest amount generated.
3. After the Loan Tenure: You can also opt to pay the interest amount once all your EMI's have been paid. Based on your terms with the lender, you can further divide this amount into instalments and pay periodically.

Moratorium period in home loan is an excellent facility to support you in the times of financial crisis. Before you avail the loan, clear every doubt about the moratorium period as offered by the lender. You need to ensure that you are comfortable with the interest rates and any other accompanying conditions. Once satisfied, then you can plan the time when you will like to take this holiday period.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.