A mortgage restructure is no easy run

Unforeseen circumstances can completely derail an individual’s financial plans and even affect the ability to repay home loan payments on time. Many borrowers might be tempted to go back to their country to avoid repaying mortgages.

As time passes, this exposure with its interest and penalties can turn into a monstrous sum. One of the best things to do in these situations is not to run and hide. Instead, go ahead and ask the bank for a debt restructuring.

This allows the individual to alter the terms of the mortgage contract to repay outstanding obligations. It allows an individual — or a company facing cashflow issues — to renegotiate the delinquent debt to improve liquidity and continue making timely payments.

This payment can be of a longer tenure, by way of smaller monthly repayments as per the financial condition of the individual. And these also carry a lower interest rate.

Restructuring debt can be a win-win for both entities, as the individual avoids filing for insolvency, and the bank typically receives more than what they would through legal proceedings.

A five-step process

— Before talking to the bank, create a summary of the current financial situation. It should include all outgoing expenses and other debts, including credit cards and personal loans. Strictly follow a total transparency protocol.

— The next step should be keeping an account of current expenditure, including personal expenses to help the bank realise that you will fall short of paying the monthly installment on the mortgage.

— The restructuring evaluation will be based on total household income, including the rental income of the property and that of the spouse. Have all the proof available when discussing with the bank.

— Continue to make payments to the bank at the reduced sum, which will go a long way to display intent, despite the reduced ability.

— Approach the bank with all the data to figure out a repayment strategy.

Factor in all possibilities

There is no single plan that fits every mortgage borrower for restructuring. The chance of receiving the benefit depends on factors such as:

• The repayment track record for mortgage payments before facing the financial crisis.

• Reduced salary or business income must be evident in the bank statements. Rental income alone cannot be used as the basis to restructure mortgage payments.

• In cases where the individual loses the job and the sale proceeds from the property can secure the outstanding amount, the bank can demand foreclosure rather than a restructuring.

• Even though the central bank has removed the maximum age limit for mortgages, the individual’s age and capacity to work post-retirement will play a role in the bank’s decision.

Depending on these factors and more, banks can reduce the interest rate on the loan, increase the loan tenor, provide a payment holiday, or reschedule the interest and principal payments.

— Jaya Ratnani is Managing Partner at Freed Financial Services.