Vijay Valecha, Special to Khaleej Times August 07, 2021
Compared with previous years, a relatively low-interest rate regime offers an opportunity to re-evaluate assets and liabilities.
Experts advise that borrowers take an earnest look at the loan agreements to check if there is room for savings. Compared with previous years, a relatively low-interest rate regime offers an opportunity to re-evaluate loans and possibly save a few extra dirhams every month by getting the loans refinanced.
"Re-evaluation of liabilities is as important as re-evaluating the assets," says Lakshmana Swamy, Co-Founder, MyMoneySouq, a financial product marketplace in the UAE.
"The interest rates on loans keep changing according to the market. The value of loans might increase or decrease over time; re-evaluating once a year or more will not just give the loan holder a clear picture of the liabilities but also the possibility to find better options."
Currently, home loans at variable rates hover around 2 per cent, and five-year fixed mortgages start at around 2.75 per cent. The interest on personal loans, on the other hand, range between five and nine per cent depending on factors such as the source of income, credit history, age and employment status of the applicant.
"This low-interest rate environment wasn't the case a few years ago," says Vijay Valecha, Chief Investment Officer, Century Financial.
"The benchmark interest rate in the UAE was hovering around 2.25-2.5 per cent during 2018, before the central bank's move to cut interest rates in 2019. In 2018, the average mortgage interest rate in the region was around 3.75-4.25 per cent, while interest on personal loan would be way more than the current ones owing to higher rates in the past."
Who should explore this option?
Practically anyone who has a mortgage taken in 2018 or before.
"If an individual had taken a loan in 2018, when the EIBOR was hovering around 3.5 per cent and considering the low interest rates currently, the refinancing of the loan seems a viable choice where a borrower takes a new one to pay off their existing debt, and the terms of the old loan are replaced by the updated agreement," says Valecha.
One must not forget the penalty for early settlement, he adds.
In case of personal loans, discuss with your banker or financial planner on what kind of savings can be made.
A personal loan contract is shorter than a mortgage. Explore refinancing or buying out options only after factoring in early settlement payments and processing fees of the new loan agreement.
What kind of savings are expected?
Interest rates are a major part of a loan. Therefore, getting a loan at a lower rate will definitely have a significant impact on the savings.
A 2018 loan with EIBOR around 3.5 per cent, if refinanced using current EIBOR of 0.5 per cent, would roughly save 80 per cent in interest expense for the borrower.
Explains Swamy: "If a person has a loan of Dh1 million for a tenure of four years at an interest rate of five per cent, the overall interest amount will be approximately Dh105,406 by the end of the tenure. After a year, the loan amount would be Dh768,389 with a monthly EMI of around Dh23,029."
"Re-evaluating the loan after a year and finding a lower rate product at say four per cent will derive the interest rate amount of Dh48,304 for three years. This is evidently 45 per cent less than the overall interest rate amount that was planned initially."
Having a good credit score helps
Credit score plays an important role for banks in evaluating a borrower's worth and key decisions such as interest rate and a person's eligibility for loan.
"The higher the credit score, the higher the chances of getting a low-interest loan. During the re-evaluation, it's the credit score and the timely payments of instalments that will help in negotiating the interest rate with the lender. A credit score gives assurance to the lender of timely payments," says Swamy.
Things to keep in mind
You can call up your bank to ask if the current loan agreement can be revised, or if you are exploring options with other financial institutions, do consider the costs involved in securing a new agreement.
"A buyout loan involves processing fee and early settlement fee at the existing lender. The loan holder must determine what would be the savings when the processing fee, early settlement fee is paid after getting a new loan for less interest rate. Also, in the case of a buyout loan, ensure the new interest rate doesn't tend to rise after the welcome period," advises Swamy.
Adds Valecha: "The refinancing move generally results in savings for the borrower. However, in case of refinance for mortgage, one should consider a few charges such as a settlement fee to the old lender, property valuation fees, a mortgage de-registration fee with the Dubai Land Department (if the property is in Dubai), a mortgage registration fee, a DLD title fee and any other miscellaneous charges."