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Mortgage products are becoming attractive to residents and foreign investors. Picture used for illustrative purposes. Image Credit:

Dubai: 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.

Can NRIs can refinance their mortgage in India?

NRIs can refinance their mortgage in India. Experts evaluate that 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.

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.

What NRIs need to keep in mind when refinancing

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.

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.

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Apartment buildings in Palava City, Mumbai. India’s real estate market is going through a transformation, with recent moves empowering property buyers in unprecedented ways. Image Credit: Bloomberg

Is this the right time to refinance mortgages?

Home loan interest rates in India are very attractive right now, with some leading banks offering rates between 7.5 percent to 10.5 percent, depending upon customer profile, loan amount and credit score, among other factors, according to 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 kept the repo rate (rate at which the central bank lends money to banks) unchanged at 4 per cent, which is the fourth time in a row the apex bank has kept the key rates unchanged. This measure has been lowering interest rates for individuals, including home loan seekers.

The RBI has also kept the reverse repo rate (rate at which central bank borrows money from banks) by at 3.35 per cent to encourage banks to provide more loans to sectors including housing. NRIs have been looking to capitalise on this opportunity.

Indian banks are offering rates starting from 7.5 percent on a home loan. The current interest rate for a mortgage in India ranges between 7.5 per cent to 10.5 per cent. Depending on the rate difference, the costs savings to refinance a mortgage may be significant. The rates are currently the lowest in over last 20 years and hence are very attractive for borrowers.

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] in 2019. 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 per cent lower interest rates.

Rate rivalries rife

The mortgage market in India is under immense burden considering the current pandemic-induced economic turmoil. Therefore, NRIs should leverage this opportunity to lock in the best rates possible on their mortgage.

There have long been a rate rivalries among banks. They have been quite competitive to offer the best lending rates. 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.

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.

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Reserve Bank of India RBI building in Mumbai, India Image Credit: Bloomberg

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 fixed rate linked to the RBI repo rate as there is a possibility of fewer rate cuts – and rates to remain steady in the months to come.

However, if you choose a variable rate loan, you don’t have to pay a penalty for prepayment. Going forward, you can make a few prepayments during the course of the loan, which will keep down the impact of any possible rise in the interest rates.

We are still in a falling market, and rates are expected to stay stable in the near future. Keep in mind that 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 per cent to 2 per cent more than floating rate loans. This will make your loan much more expensive compared to a floating loan, especially if interest rates fall further.

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.

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.

Experts also advised NRIs to get a statement from their current lender to state that all relevant documents will be transferred within a stipulated timeframe.

THINGS TO CONSIDER WHEN REFINANCING PROPERTY IN INDIA
• Opt for refinancing only if the difference between the rate of interest you are currently paying and the one available now is more than 50 bps or 0.50 percent

• 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 per cent of the prepaid amount.

The mortgage processing fee is typically not more than Rs10,000 (Dh505) 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 per cent in others).

The general terms and conditions vary based on banks. The application fee varies from Rs1,000 to Rs5,000 (Dh50 to Dh250) depending on the bank, processing fees can vary from Rs10,000 (Dh505) to 1 per cent 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 (Dh25). Mortgage registration would be 1 per cent 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.

HOW TO REFINANCE YOUR DEBT-FREE PROPERTY IN INDIA?
NRIs can refinance their debt-free properties in India. Only a few housing finance companies offer this facility and there are some restrictions on the end use of these funds. Customers must check these terms carefully before opting for the scheme.

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.

Considering the interest rate to be around 8 to 10 per cent, 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.

A maximum of $1 million (Dh3.67 million) can be remitted overseas from NRO account in a year. The maximum a resident can transfer to a non-resident is $250,000 (Dh918,300) a year.