Managing Mortgage Debt During Covid-19

The Covid-19 pandemic has had a devastating impact on the economy, derailing many of our financial plans as well as the ability to pay home loans. The situation has become even more challenging due to drop in property values, rental yield, the salary cuts, loss of jobs, as well as income losses for the businesses. The long-term effect related to Mortgage Debt is beginning to be damaging.

What happens if you default on Mortgage Loan repayment?

Despite brief moratorium being offered, the Mortgage Debt can have a long-term impact. Many borrowers are finding it very difficult to repay the Home Loan and are thereby considering the option of relocating to their home country since no alternate options are available.  

However, choosing such an option can have immense ramifications, and there can be serious legal consequences. Unpaid Mortgage with time can turn into a monstrous sum as the interest & penalties get added to the loan. However, Debt Management options are available that can help to mitigate a bad debt situation. If you are wondering which is the best suited option for you and the option that will hurt your credit rating the least, here is what you need to know. 

Debt Settlement Plan:

Borrowers who are facing threat of job loss or businesses that have to shut down due to economic crisis – Debt Settlement plan would be the best-suited option. 

The plan includes finding a suitable buyer and liquidating the asset. If it is not possible to cover the outstanding loan amount out of the sale proceedings, the shortfall can be negotiated with the bank.  This can include options like reduced repayment sum, flexible payment on shortfall – single or multiple, at a lower rate of interest.

Because a settlement plan allows you to pay an amount that is lower that what you owe, this will affect your credit rating for several years after the final payment. It will also take a substantial amount of time to restore enough credit to apply for Credit cards or loans.

Debt Restructuring:

If you are facing problems due to salary cuts drop in the business income, and debt-burden ratio more than 50%, then Debt Restructuring would be the most helpful option.  In such a process, based on the financial situation and repayment track record, banks can modify the terms of existing debt and provide relief in repaying the monthly obligations. This can help an individual or company to improve liquidity & continue making payments.

The banks can offer options like, reduce the interest rate on the loan, increase the loan tenor, provide a payment holiday, or reschedule the interest and principal payments.


Under this law, Borrowers are supported against legal prosecution and a three-year plan is offered to settle the financial obligations. If you intend to seek help under this option you will have to submit an application to the court with the following documents –

  • A memorandum containing a brief description of your financial situation, income statement along with the list of movable and immovable assets both, inside and outside the country. 
  • It also requires your liquidity projections and the list of creditors that have been defaulted or expected to default in the coming months. You will also need to list down the guarantees that were provided while taking the loan.
  • A proposal for the settlement needs to be submitted explaining your financial difficulties and the funds that you require to support your family members.
  • Once the court approves your application, it will appoint one or more experts that will assist you in formulating a long term plan to settle your financial obligations.

The insolvency option should be the last option as it may damage the credit rating adversely for a long time. Such an option can discourage the creditors to loan money in the future.

How to manage your Mortgage Debt

A few steps that are involved to complete the whole Mortgage Debt Management process systematically are discussed as under. 

  • Identify the problems that are making your loan repayment program difficult.
  • Prepare a cover letter that explains the events leading to such a situation and why you are looking for settling or restructuring your debt. 
  • Gather all the important documents related, such as bank statements, termination/salary reduction letter, cash-flow position, other assets and borrowings.
  • Discuss with the bank or an expert for the right solution.