Loans
Pros and Cons of Home Loan Restructuring
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Sep 24, 2024
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Date: 24th August 2024 | Read time: 4.5 Minutes
Home loan restructuring is the best alternative for the borrowers who cannot pay their due amount of loan either for a temporary or permanent period or looking for better conditions than the one offered. Hence, both the advantages and disadvantages should be kept in consideration before opting for home loan restructuring. Here's an in-depth look at home loan restructuring, along with its benefits, disadvantages, and eligibility criteria.
What is Home Loan Restructuring?
Home loan restructuring essentially refers to an alteration in the terms and conditions of the already existing loan. Herein, generally, either the tenure of the loan or the rate of interest or the amount of EMI Equated Monthly Instalment is changed to better fit the financial condition prevalent at that time. The main motive behind this restructuring is to make the loan payable and affordable.
Restructuring of a home loan can come quite in handy when one is facing financial squeezes, and one wants to take advantage of lower interest rates or needs changes in his schedule of payment. However, one must weigh between the pros and cons before embarking on it.
Eligibility
One needs usually to meet the following criteria to be qualified for home loan restructuring:
1. Good Payment History
In most cases, lenders require a good record of timely payments that you have made for your ongoing home loan.
2. Financial Hardship
Evidence of financial hardship or a variation in your financial position may be required.
3. Existing Relationship
Restructuring is usually possible for loans that have the same lender from whom the home loan was originally taken.
It is always good to talk with your lender in person and know about their specific requirements and their approach towards restructuring a home loan.
Advantages of Home Loan Restructuring
1. Reduced EMIs
One of the major advantages of restructuring home loans is that it may decrease the amount of EMIs. You can lower your monthly payables by increasing the loan tenure or by negotiating a reduction in interest rates, hence making your EMIs more affordable in the current budget.
2. Lower Interest Rate
If market interest rates have fallen since you availed your home loan, then you may restructure and move to a lower rate that could save you money in interest payments over the life of the loan.
3. Consolidation of Loans
In many cases, restructuring enables you to merge many loans into one home loan, which makes it easier for you in repaying and may reduce your overall interest payments.
Disadvantages of Restructuring Home Loan
1. Increased Overall Interest Cost
Increasing the tenure of the loan by reducing your EMIs often results in your paying higher interest over the whole lifetime of the loan. What this essentially implies is that although the monthly instalments get smaller, the overall cost of the loan could increase.
2. Additional Charges and Fees
Other than the above-mentioned charges, extraneous charges for home loan restructuring include a processing fee, prepayment penalty, or even legal fees. These can add up and cancel out part of the benefit of restructuring.
3. Extended Loan Tenure
While increasing the tenure reduces the monthly instalments, you will also be in debt for a longer period. Thus, an extended tenure can seriously affect your long-term financial planning and goals.
4. Impact on Credit Score
Similarly, restructuring or changing your loan terms constantly will have an impact on your credit score, particularly if payment one or several payments are missed in the process, or when your lender reports any form of restructuring to the bureaus.
Also Read: [Home Loan Eligibility Criteria: What You Need to Know]
Conclusion
Refinancing a home loan comes with a host of considerable benefits that include reduced EMIs and better financial flexibility. This becomes all the more relevant if you are saddled with high monthly repayments or in case of any change in your financial circumstances. On the downside, increased overall interest costs and additional charges mean it has to be carefully thought out.
For instance, you can use a home loan EMI calculator to know what restructuring of a loan will affect: your monthly payables or the total cost of the loan. Based on your financial conditions and terms and conditions of restructuring with your lender, you can take an informed decision that suits your long-term financial goals.
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