Home Loan Refinancing - A Viable Option for NRIs During COVID-19 Crisis
NRIs may be steadfast patrons of property investments in India, but the current COVID-19 crisis has toppled economies and personal finances worldwide and NRIs are not immune. Many NRIs settled in Europe, America and the Middle East who have bought real estate in India are considering refinancing their home loans. Job insecurity or not, this is an apt time for NRIs to rectify some ongoing equations and look at increased savings wherever possible.
What is loan refinancing?
Refinancing means taking a new loan to pay off one or more outstanding loans and like Indian residents, NRIs can opt for ths route if they need to. 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 avail an additional loan opportunity, or to top-up the original amount borrowed. Refinancing is also a useful tool to consolidate debt.
More attractive rates
Home Loan interest rates in India are extremely attractive right now, with some leading banks offering rates between 7.15 to 9.5 percent. Interest rates could reduce even more - last month, the RBI had cut the repo rate by a whopping 75 basis points bringing in down to 4.4 percent from the earlier 5.15 percent. The RBI has also reduced the reverse repo rate by 25 bps to 3.75% to encourage banks to channelize liquidity and provide more loans to sectors including housing.
The National Housing Bank has also recently been sanctioned INR 10,000 crore to provide special refinance facilities. The enhancement in liquidity is also expected to incentivise banks and NBFCs to increase their loan deployment. Banks and HFCs have also been allowed to provide a 3-month moratorium on EMI payments.
The home loan rate varies for different customers, with banks charging higher interest rates on loans to self-employed individuals over salaried borrowers. Given the recent rate cut, banks are expected to reduce the current home loan rates offered to existing customers. However, this transmission of rate cuts to customers is not immediate, and it may take some time before borrowers will benefit.
Fixed or floating rate?
Both fixed and floating interest rates have their pros and cons, and NRIs need to choose the one which they are comfortable with. The most significant advantage of a fixed interest rate is that it shields against market fluctuations - one can plan monthly expenditure and future investments with greater accuracy. However, there is a price to pay for such security - the borrower does not benefit from interest rate reductions. Also, a fixed interest rate is usually 1-2 percent higher than the floating interest rate.
A floating interest rate is dynamic and is directly linked to market fluctuations. Until April 2019, floating interest rates were linked to the Marginal Cost of Funds Based Lending Rate, also known as MCLR. Now, they are linked to external benchmarks like the repo rate. Floating rate loans are slightly cheaper than fixed interest rates and one also benefits every time the RBI slashes the repo rates. However, any sudden changes in one's EMIs can impact financial planning if one is not prepared for it.
Costs and implications of refinancing
Refinancing a home loan does come at a price, and NRIs must consider the following factors when opting for it:
1 Seek clarity on processing fee, valuation fee and other charges applicable on a fresh loan
2 Ask for a statement from the current lender stating that all relevant documents will be transferred within a stipulated timeframe
3 It is best to opt for refinancing during the early part of the loan tenure; there is no major benefit in switching later as a big chunk of the interest has already been paid in the initial years.
4 Learn to identify high mortgage charges and do not just choose the first lender offering refinancing; researching the offerings of different lenders helps to avail the best refinancing benefits.
With the rupee value against the dollar constantly depreciating over the last one month, NRIs have found more value for their currency than before. They are also secure with the knowledge that their real estate investment has displayed more resilience and stability in these turbulent times than other asset classes like equity, crude oil and bonds.
It may take several months or even more for the global economy to recover from the ravages of the pandemic, and home loan refinancing can be a useful way for NRIs to make some significant financial savings.
--Shajai Jacob, CO - GCC, ANAROCK Property Consultants