What is a Moratorium Period?

What is a Moratorium Period?

A moratorium period is when your lender allows you to stop making payments for a specific period of time. A moratorium is similar to a deferment or forbearance.

A moratorium period is a period during which the borrower is not obligated to make payments. In other words, during a moratorium period, the borrower is permitted to halt their payments. It is commonly incorporated in home loans – called an equated monthly installments holiday – and educational loans.

What is moratorium period in home loans?   

In case of delayed construction, lenders allow borrowers to encash their moratorium period facility only if this clause is included in the home loan agreement between the lender, borrower and the property developer. For under construction properties, lenders provide a grace period of 18 months or one month post possession, whichever is earlier whereas in case of ready-to-move-in properties, the grace period is generally very short i.e. one month.

Home buyers can typically opt for a moratorium period in the event that the project they’ve invested in gets delayed and they are not in the position to double their monthly outflow for their living arrangement i.e. paying rent for the current premises they are occupying along with the home loan EMIs. Even though the loan repayment begins the moment the home loan amount is disbursed to the borrower, they are allowed to defer the EMI payments until they are given possession of the house, in case of delayed construction.

This grace period also allows borrowers to maintain their budget since it gets difficult to pay for both, home rent as well as high amount EMIs.

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Moratorium Period in the News

Examples of moratorium periods in the news are provided below:

Due to the coronavirus pandemic, the National Student Loan Service Centre in Canada announced that it would allow students to pause their student loan payments from March 30, 2020 to September 30, 2020. The pause on student loan payments is part of a rescue package for the Canadian economy.

Also, following the coronavirus pandemic, the Reserve Bank of India offered relief to loans (such as home loans, personal loans, education loans, etc.) in the form of a moratorium period from March 1, 2020 to August 31, 2020. Although borrowers are not required to make payments during the moratorium period, the Reserve Bank of India indicated that interest is not waived off and will continue to accrue.

Is a Moratorium Period Beneficial?

The ability to defer payments into the future offers greater financial flexibility. However, it is important to recall that interest generally accrues over the moratorium period, resulting in a higher total loan amount payable.

Unless the borrower is under financial distress – i.e., unable to make payments – the financial flexibility of a moratorium period is largely offset by the additional interest charge.