NRIs may be the steadfast patrons for India’s investment, in other words, maybe the important source for a foreign exchange through the investment by the NRIs. But due to COVID-19 the financing and economic conditions are crashed as they do not have the finance to invest. Many NRIs settled in Europe, America, Middle East and bought the properties in India are considering to refinance their loans as this is suitable for this time. They consider this time to rectify the ongoing conditions and search for possible ideas to save finances.
What is loan refinancing?
Loan refinancing means taking a new loan to pay off the existing loan. As Indians, it can be taken by NRI also if they need to. Refinancing a home loan rate will result in a low-interest rate or, one can switch from fixed to a floating rate or vice- versa. Refinancing is a good option if the NRI wishes to avail of additional loan opportunities or to top up the original amount borrowed. Refinancing is also a good tool for the consolidation of debt.
Experts in Finance also reviewed that NRIs can refinance the loan in India. It is advisable to refinance the loan if the difference between the rate of interest they are paying and the one is available now is more 0.5 percent. In addition, if the NRI is outside India for refinancing and he cannot come then, he can give power of attorney to someone on whose behalf the attorney refinance the loan in bank acceptable format.
Fixed or Floating rates?
Both fixed and floating rates have their pros and cons, and NRIs have to choose one of them which is comfortable to them. The most significant advantage of a fixed interest rate it protects from the market fluctuations- one can plan the monthly expenditures and future investments with more accuracy. In addition, a fixed interest rate is usually more than the floating rate from 1- 2 %.
Floating rates are very dynamic as they changed with time and directly linked with fluctuations. Until April 2019, floating interest rates were linked to the Marginal Cost of Funds Based Lending, also known as MCLR. But now it is linked with the repo rate. Floating rates are slightly cheaper than fixed interest rates and one also benefits when the RBI changes its repo rates. However, sudden changes in one EMIs can impact financial planning if he is not prepared for it.
Home loans with variable rates do not have a prepayment penalty whereas, fixed interest home loans have a flat prepayment penalty, which may be as much as 2 percent of the prepaid amount.
There are rate rivalries among banks. They are becoming very competitive in offering the best lending rates. Banks also reducing the rates for existing customers for fear of losing them. Those with the loans benchmarked to RBI repo rate have seen a fall in the rates while those with MCLR or PLR as benchmark have seen a lesser fall. So, the NRIs should take advantage of this opportunity to lock in the best rates possible on their mortgage.
Costs and implications of loan refinancing:-
An NRI must consider the following things while opting for refinancing the loan since it comes for a price:-
- Information about all the fees applicable to fresh loans like processing fees, valuation fees, and other charges.
- Ask for the statement from the previous bank stating that all the relevant documents shall be transferred within the decided time frame.
- It is good to refinance the loan within the tenure in the early years as there is no major benefit to refinancing later as the NRI made the payment of interest in the early years this will go all waste.
- Opt for refinancing only when the rate of interest you are currently paying and what is available is more than 0.5 percent.
- Learn to identify high mortgage charges loans.
- DO not choose the first refinancing company, do some inquiries before taking any step to avail the best refinancing benefits.
- It is advisable to opt for floating charges which is linked with the RBI repo rate as there are chances for further cutting of rates.
- You don’t have to pay a penalty for prepayment on a variable rate loan.
Firstly, when applying for refinancing there are general terms and conditions of banks. this is usually vary based on banks to banks according to their policies, their strategies, and their objectives. As the policies, strategies, and objectives of banks are different so that their terms and conditions are also different. With the terms and conditions, there is specified for application fees which may be from Rs. 1000-Rs. 5000 depending upon the banks, they can decide freely upon this matter.
After agreeing to the terms and conditions and depositing of application fees the banks also charge for processing fees which is not more than Rs. 10000 in the case of salaried customers. For others, it may be Rs. 10,000 to 1 percent of the loan amount. Stamp duty is also applicable in some states like Maharashtra, Kerala, Rajasthan, Karnataka, West Bengal, Odisha which ranges from nil rate in some states to up to 0.5 percent in others. Stamp duty as per the Stamp Act which is under the state’s list so the states can levy the duty as per their will.
Also, the valuation cost is to be paid in the refinancing of loans. The valuation cost is based on the property. On average, per lakh, the valuation fee could be Rs.500. It is compulsory to pay these charges as the valuation has to be done which is kept as security interest which can be enforced if it is non – repayment of the loan at any point of time and after 90 days of non- payment it shall be considered the Non- performing Asset in the balance sheet of the bank. So this is necessary to have the valuation in order to ensure that the property has more value than the loan amount. 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.
How to refinance debt-free property in India
NRIs can also refinance the debt-free properties in India. Only a few housing finance companies in India provide this facility. Also, there are certain restrictions on the end use of the amount. Customers must consider the terms and conditions before taking the scheme.
It is possible that the NRI take the loan against the loan of the property of India. So, firstly the customer must check the interest rates in their home country, if the interest rates are lower than Indian interest rates then, he can take the loan from their home country and pay to the Indian bank. For this, you must also consider the exchange rates, processing rates, and foreclosure costs. Check if there are significant savings before taking up this option.
Considering the interest rates to be 8-9 percent, NRI must study if the funds will be sufficient for end-use or repatriation to the UAE if the money needs to be utilized there.