Non Resident Indians (NRIs) in the UAE account for a big a chunk of property demand in their home country. While some take out personal loans from the UAE to fund their property investment in India, others choose to take a home loan from an Indian bank instead. With the COVID-19 crisis hitting personal finances worldwide, NRIs are not immune either. This is an apt time for NRIs to consider cost savings by refinancing their mortgage taken from an Indian bank.
What is refinancing?
Refinancing means taking a new loan to pay off one or more outstanding loans and like Indian residents, NRIs too can opt for this. Refinancing a home loan will result in a lower interest rate, or one can switch from a fixed to a floating rate or vice versa. Refinancing can also be a viable option if an NRI wishes to top up the original amount borrowed. It is also useful to consolidate debt.
“NRIs can refinance their mortgage in India. It is advisable to do so if the difference between the rate of interest they are paying and the one available now is more than 50 bps or 0.50 percent. However, for NRIs not present in India, they can do so provided they have given a power of attorney to someone in India in a bank-acceptable format,” said Gaurav Gupta, co-founder and CEO, MyLoanCare.in.
It is advisable to refinance a mortgage if the difference between the rate of interest they are paying and the one available now is more than 50 bps or 0.50 percent
The procedure to refinance a mortgage is similar to the process of applying for a new one. However, there are a few things NRIs need to keep in mind.
“The first is the refinance costs, including foreclosure charges in case of a fixed loan, processing fees, and other charges. You need to make sure that the cost of refinancing your home loan does not make it more expensive than your existing loan. So, unless you are getting a good interest rate, you need to think hard about switching your loan,” Adhil Shetty, CEO, BankBazaar.com, told Gulf News.
Industry experts also suggest NRIs to ideally refinance their mortgage in the initial years, especially if the loan is within 3 to 4 years from the date of commencing.
Attractive interest rates
Home loan interest rates in India are very attractive right now, with some leading banks offering rates between 7.15 percent to 9.5 percent, depending upon customer profile, loan amount and credit score, among other factors, according to ANAROCK Property Consultants. The home loan rate varies for different customers, with banks charging higher interest rates on loans to self-employed individuals over salaried borrowers.
Interest rates could reduce more. Last month, the Reserve Bank of India (RBI) had cut the repo rate (rate at which the central bank lends money to banks) by 75 basis points, bringing it down to 4.4 percent from the earlier 5.15 percent. This measure is likely to lower interest rates for individuals, including home loan seekers.
Current interest rate for a mortgage in India
The RBI has also reduced the reverse repo rate (rate at which central bank borrows money from banks) by 25 bps to 3.75 percent to encourage banks to provide more loans to sectors including housing. NRIs should look to capture this opportunity.
“Indian banks are offering rates starting from 7.25 percent on a home loan. Depending on the rate difference, the costs savings to refinance a mortgage may be significant. The rates are the lowest in over last 20 years and hence are very attractive for borrowers,” informed Gupta.
The interest rates in India have been on a downswing for some time now. The RBI has taken steps to ensure that the impact of these rate cuts are being transferred to the consumers.
“We saw the introduction of Marginal Cost of Funds Based Lending Rate [MCLR] in 2016 and the External Benchmark Based Lending Rate [EBLR] last year. Both these offer much lower interest rates and therefore higher savings to the customers. Compared to the base rate and Benchmark Prime Lending Rate [BPLR], the EBLR can offer as much as 2 to 3 percent lower interest rates,” explained Shetty.
Rate rivalries rife
The mortgage market in India is under immense burden considering the current economic turmoil. Therefore, NRIs should leverage this opportunity to lock in the best rates possible on their mortgage.
“There are rate rivalries among banks. They have been quite competitive to offer the best lending rates,” said Dhiren Gupta, Managing Director, 4C Mortgage Consultancy.
Banks are also reducing rates for existing customers for fear of losing them. Those with loans benchmarked to RBI repo rate have seen a steep fall in their rates while those with MCLR or PLR (prime lending rate) as benchmark have seen a lesser fall.
This translation of rate cut is not immediate and may take some time to come through and provide any real benefit to mortgage customers
“In view of the recent rate cut, banks are expected to cut home loan rates offered to existing customers. However, this translation of rate cut is not immediate and may take some time to come through and provide any real benefit to mortgage customers,” said Shajai Jacob, CEO – GCC, ANAROCK Property Consultants.
Fixed rate or variable rate?
NRIs can opt for a fixed or variable rate based on the time horizon of their mortgage repayment. At this point, it is advisable to opt for a variable rate linked to the RBI repo rate as there is a possibility of further rate cuts. Also, you don’t have to pay a penalty for prepayment on a variable rate loan. Going forward, you can make a few prepayments during the course of the loan, which will keep down the impact of rise in the interest rates.
“We are still in a falling market, and rates are expected to stay stable or fall marginally in the near future. Also, most fixed loans are usually fixed only for a certain period, and the interest rates become floating after that. You will need to pay a huge premium to avail this interest stability as fixed loans can be anywhere from 0.5 percent to 2 percent more than floating rate loans. This will make your loan much more expensive compared to a floating loan, especially if interest rates fall further,” explained Shetty.
Premium for a fixed rate loan vs floating rate loan
“A floating interest rate is dynamic and is directly linked to market fluctuations. Floating rate loans are slightly cheaper when compared to fixed interest rates. You can also benefit every time the RBI slashes the repo rates. However, any sudden changes in your EMIs can impact your financial planning if you are not prepared for it,” warned Jacob.
With a fixed interest rate, the biggest advantage is that it shields you against market fluctuations. You can plan your monthly expenditure and future investments in a better way. But, you might lose out on the rate cut benefits when the bank reduces the interest rate.
Charges, fees to watch out for
Refinancing a home loan is not free of cost and NRIs must get clarity on the processing fee, valuation fee and other charges that will be applicable. NRIs are advised to opt for refinancing during the early part of their loan tenure. There’s no major benefit switching later as you would have already paid a big chunk of the interest in the initial years.
Jacob also advised NRIs to get a statement from their current lender to state that all relevant documents will be transferred within a stipulated timeframe.
• If you are not present in India, give a power of attorney to someone in India in a bank-acceptable format
• Ideally, refinance your mortgage in the initial years
• It is advisable to opt for a variable rate linked to the RBI repo rate as there is a possibility of further rate cuts
• You don’t have to pay a penalty for prepayment on a variable rate loan
• A fixed interest rate shields you against market fluctuations
• Get clarity on the application fee, processing fee, valuation fee and other charges applicable for refinancing
In addition to the mortgage processing fee, you may have to pay an application charge, mortgage deed fee, legal fees, etc. A prepayment fee may also be involved.
“Home loans with floating interest rates do not have a prepayment penalty; however, fixed interest home loans usually have a flat prepayment penalty, which may be as much as 2 percent of the prepaid amount,” informed Shetty.
Of prepaid amount has to be paid as prepayment penalty for fixed rate loan
According to MyLoanCare.in, the mortgage processing fee is typically not more than Rs10,000 in case of salaried customers. Stamp duty is also applicable in some states like Maharashtra, Kerala, Rajasthan, Karnataka, West Bengal, Odisha (ranges from nil in some states to up to 0.5 percent in others).
“The general terms and conditions vary based on banks. The application fee varies from Rs1,000 to Rs5,000 depending on the bank, processing fees can vary from Rs10,000 to 1 percent of the loan amount. Also, the valuation cost is based on the value of the property. On average, per lakh, the valuation fee could be Rs500. Mortgage registration would be 1 percent of the agreed sale value of the property. Apart from these, there could be a separate state government fee that would be applicable while executing the process,” informed Dhiren.
While it is possible for NRIs to take a loan against property in India, market experts suggest that you first check the loan interest rates in your country of residence. “If the rates are lower, you may want to consider taking a loan there and repaying your debt in India. For this, you would also have to factor in the exchange rate, processing costs and foreclosure costs. Check if there are significant long-term savings before you take up this option,” said Adhil Shetty, CEO, BankBazaar.com.
Considering the interest rate to be around 8 to 9 percent, NRIs must study if the funds will be sufficient for end-use or repatriation to the UAE if the money needs to be utilised here. “Moreover, funds can be derived from maximum two properties only, which is also subject to taxes. Also, the maximum funds allowed to be transferred is up to $250,000 per person per year,” informed Dhiren Gupta, Managing Director, 4C Mortgage Consultancy.