One of the first target which NRIs have is to buy a property in India. While a few lucky ones may be able to buy their dream property in India without taking a loan, others may require to take a Home Loan. Banks outside India do not provide mortgages / home loans secured against property in India and hence the only choice is to obtain home loan from a bank in India. Unfortunately, home loans in India don’t come cheap and can range upto 12% !
The motive of this article is not to give tips on how to get home loan in India, but to give some tips on how to use the low interest rate scenario currently prevailing in countries outside India. For example, a home loan in UK & US can range from around 1.5 % – 5% interest rate. People in India listen with their jaws dropping down as this low interest rate scenario has never been experienced in India. So how can NRIs use the opportunity of low interest rate scenario to minimise their interest rate payouts in India. Lets look into the following scenarios which can be possibly leveraged upon :
Mortgage Outside India
If you have a home outside India which you have taken on a mortgage (home loan), then there is always an incentive to pay back the mortgage every year to reduce the outstanding loan amount – after all we are Indians. We first like to invest in an asset for which we would need to take loan. Once we have a loan, the first priority goes towards repaying the loan. The interest being paid on overseas mortgage in most of the cases would be less 4-5%. On the contrary the interest rate being paid in India would be around 12%. My suggestion is not to pay back your mortgage outside India and use the surplus funds to repay the loans in India. The saving would be Interest rate in India Less Interest outside India. In our example, it would be 12% – 4% = 8% p.a.
Personal Loan Outside India
If you ever had to take a personal loan in India, you would have realised that the interest rate would have been over 18%. For unlucky chaps with poor credit history, this interest rate can be as high as over 30%. Refer to our article Improve your Credit History – Timeline of Your Current & Future Financial Image for more details on Credit History. On a similar note, personal loan interest rates in developed markets such as UK / US is generally around 6-10% p.a. If you would notice, this is significantly less than even the fixed deposit rates in India and interest rate paid on housing loan in India. So what could you as NRIs do ? The first option is to take a personal loan in your respective country and repay your loan in India. If you do not have a loan in India, you could take a 5 year personal loan and invest it in India in current high interest rate scenario which is offering approx 9.5% interest.
Credit Card financing
Credit card companies outside India generally come up with promotional interest rates throughout the year. In many cases they give an option of 0% balance transfer rates for over 12 month duration. Obviously it comes with an upfront cost of approx 3-4%, however, it is still a cheap source of finance. If you have a mortgage in India or have an attractive investment option in mind, you may want to make use of this financing option to your benefit.
After mortgage, this is the next cheapest form of financing option available to NRIs outside India provided they have a house property in their name against which they can obtain a secured loan. Interest rate on this mode of finance is generally 1-2% more than the mortgage rates. You could either use this as a a mode to repay your costly finance in your respective country or repay your loan obligations in India. For example, in UK NRIs can obtain this form of financing at around 4-5%. They could use this loan to either pay of their personal loan in UK on which they may be paying approx 7-10% interest or their loans in India. You could even think about using this mode of finance and purchase assets in India or any other location.
Pitfalls to Avoid
While all of the above mentioned mode of finances may sound as easy money, you would still need to repay it back to the banks. No loan can be classified as a good loan – try visiting our article Good Loans and Bad Loans to get a completely different perspective of loans on financial well being of an individual.
Another common pitfall is Exchange rates. If you live in US, you would be taking the loan in US Dollars. If you intend to remit the funds to India, you would be converting your Dollars into Indian Rupee at the prevailing exchange rates (e.g. Rs. 54/ dollar). However, if you have an investment structure in mind whereby you would take a one year loan in US at 4% and then remit the funds into India for a 1 year FD quoting at 10%, you should also consider the risk of foreign exchange fluctuations. In the above case, your gain is 6%. However, if the exchange rate changes from Rs. 54 to Rs. 58, your entire investment calculation would turn into a loss.
I would suggest to use the tips mentioned in this article to reduce your overall cost of borrowing (specially if you have loans taken at high rates of interest in India). Avoid falling into the temptation of taking a loan just because it is at a cheap rate. End of the day you would have to repay it and trust me it is really painful to repay loans !