Home loan restructuring: How to reduce your EMI, eligibility rules and impact on credit score explained

Restructuring may provide relief from immediate repayment pressure, but borrowers should understand its potential consequences for their credit history. (AI-generated image used for representational purpose.)AI Quick ReadLosing a job, facing a medical emergency or experiencing a sudden reduction in income can make it difficult to keep up with home loan EMIs. For borrowers with outstanding loans running into several lakhs, even a few missed payments can create financial pressure and affect their credit history.

However, borrowers struggling with repayments may have options other than defaulting on their loans. One possibility is home loan restructuring, under which a lender modifies the repayment terms to make instalments more manageable. While this can provide immediate relief, it may also increase the total interest payable and affect the borrower's credit profile.

Home loan restructuring involves modifying the original terms of a loan agreement when a borrower faces financial difficulties.

Under the Reserve Bank of India's regulatory framework for stressed assets, restructuring refers to concessions granted by lenders because of a borrower's financial difficulties. These may include changes to the repayment period, instalment amount or interest rate.

For instance, a borrower who has lost their job and cannot afford the existing EMI may request the bank to extend the repayment period. This would reduce the monthly instalment but could increase the overall interest cost.

However, restructuring is not an automatic entitlement.

Banks assess requests based on their internal policies, the borrower's repayment history, financial circumstances and ability to meet the revised repayment obligations. Borrowers may be required to submit documents establishing their financial difficulties, including salary statements, bank statements or evidence of job loss.

Importantly, restructuring does not necessarily reduce the outstanding principal. It primarily changes the terms under which the borrower repays the loan.

One way to reduce the monthly repayment burden is to extend the outstanding loan tenure.

Consider a borrower with an outstanding home loan of ₹40 lakh at an annual interest rate of 8.5%. If the remaining repayment period is 15 years, the monthly EMI would be approximately ₹39,390.

However, if the bank agrees to extend the remaining tenure to 20 years, the EMI would fall to approximately ₹34,713. This translates into monthly savings of around ₹4,677.

While the reduction may provide immediate financial relief, there is a significant long-term cost. At the same interest rate, the total interest payable over 15 years would be approximately ₹30.90 lakh. Extending the repayment period to 20 years would increase the total interest to around ₹43.31 lakh.

This means the borrower would pay approximately ₹12.41 lakh more in interest in exchange for a lower monthly EMI.

The illustration assumes a constant interest rate, no additional charges and no prepayments. Actual costs will depend on the lender's revised repayment terms.

Apart from extending the repayment period, lenders may consider other arrangements depending on their policies and the borrower's financial circumstances.