Difference between loan restructuring and loan refinancing

When getting a home loan, you will certainly come across terms like “loan restructuring” and “loan refinancing”. Are they more or less the same? No, there is a difference between loan restructuring and loan refinancing.

These terms don’t concern you if you’re still in the process of getting a home loan. These options become available to you when you have taken the loan and you are either finding it difficult to pay your EMIs or you’re looking for a better EMI option with another creditor. Let’s learn what’s the difference between loan restructuring and loan refinancing.

What is home loan restructuring?

Loan restructuring means altering an existing loan contract. It is also called debt restructuring. In most cases, the borrower opts for home loan restructuring when they are on the verge of defaulting. This may involve increasing the tenure of the loan repayment or reducing the EMI so that it becomes easier to pay.

A borrower may opt for home loan restructuring for the following reasons:

• Unexpected financial difficulties: The borrower lost their job. There was a medical emergency. There was an unexpected reduction in income.
• Higher interest rate: The borrower is finding the interest rates quite high, and they would like to restructure the tenure or the principal amount to lower the interest rate.
• The ability to pay the loan earlier: The borrower may want to shorten the tenure by raising the EMIs.
• Lump sum payment: The borrower has access to extra cash that they can use to make a big payment to lower the interest rate, decrease the EMI or shrink the tenure.

What is home loan refinancing?

Home loan refinancing is an option for those who are getting a better bargain from another lender. This shifts the debt to a lender or a bank that provides a better interest rate or friendlier terms and conditions.

Let’s understand with an example.

You take a home loan from Bank A and you’re paying an interest rate of 7.38% per annum. Then you find out that another bank, Bank B, offers an interest rate of 6.90% per annum. Suppose a principal amount of Rs. 30,00,000 remains with Bank A. You take a loan of Rs. 30,00,000 from Bank B, and use it to pay back to Bank A.

Now you owe nothing to Bank A. You have taken your loan from Bank B at an annual interest rate of 6.90%. It’s the same thing. You still have a home loan to pay. The principal amount hasn’t increased. Only the interest rate has come down.

As another option, in case you need some more cash, you can take Rs. 40,00,000 from Bank B, and pay Rs. 30,00,000 to Bank A, and use the extra Rs. 10,00,000 for other requirements.

Why do creditors accommodate home loan restructuring?

Every creditor gives loans to earn a certain interest. If the borrower gets into a financial crunch, they may start defaulting on the EMIs. This is in nobody’s interest.

Even if the creditor possesses the collateral (for example, the home purchased from the loan), lots of hassle is required to retrieve the actual loaned amount.

Hence, many creditors go out of their way to help their borrowers pay as much money as possible and even if that means restructuring the loan in terms of stretching the tenure or readjusting the interest rate.

Why do borrowers go for home loan refinancing?

Home loan borrowers go for refinancing to get a better deal. Different lenders and banks are constantly coming up with better home loan schemes to attract new borrowers. Therefore, the terms and conditions for which you borrowed money 5-10 years ago may have been altered in recent years due to new economic conditions. Rates are also changed because of new government policies and RBI decisions.

Most of the borrowers go for home loan refinancing for the following reasons:

• A lower rate of interest is available.
• A higher loan amount is available with another lender.
• There is a greater facility for changing a fixed loan to a floating or flexible interest rate.
• There is a possibility for a reduced tenure.
• Terms and conditions are better and more accommodating.
• The borrower is more comfortable with a particular bank or lender.

What’s the biggest difference between loan restructuring and loan refinancing?

The biggest difference is that when a borrower restructures their loan, the money remains in the same bank or with the same lender. It is mostly done when there is a financial problem with the borrower. The lender or the bank wants to make some accommodations so that it becomes easier for the borrower to return the money with interest.

When a borrower restructures the loan, they are looking for a better bargain. Maybe another bank or another lender is providing a better interest rate, or the terms and conditions are better. So, they take the loan from the other bank, pay the entire principal amount to the present bank and then enjoy the benefits of their new lending partner.

Conclusion

Is it always profitable or convenient to restructure or refinance a home loan? Depends.

Calculate long-term and short-term costs when going for restructuring or refinancing. There will be different types of processing fees. Some banks charge a penalty if you pay the entire principal amount way before the tenure ends. Make sure that the money that you lose due to the penalty is not more than the money you intend to save due to refinancing.

Other than that, most of the banks want to make it as much convenient for you as possible to not only pay the money back but pay it with interest.