United Arab Emirates: Experts advise borrowers to save money by refinancing their loans – News
Compared to previous years, a relatively low interest rate regime offers the possibility of revaluing assets and liabilities.
Experts advise borrowers to carefully review loan contracts to see if there is room to save. Compared to previous years, a relatively low interest rate regime offers the possibility of revaluing the loans and possibly saving a few additional dirhams each month by refinancing the loans.
“Revaluation of liabilities is as important as revaluation of assets,” says Lakshmana Swamy, co-founder of MyMoneySouq, a financial products marketplace in the United Arab Emirates.
“Interest rates on loans keep changing depending on the market. The value of loans can increase or decrease over time; reassessing once a year or more will not only give the loan holder a clear picture of the liabilities but also the ability to find better options. “
Currently, variable rate home loans hover around 2%, and five-year fixed rate mortgages start at around 2.75%. Interest on personal loans, on the other hand, varies between five and nine percent depending on factors such as source of income, credit history, age and employment status of the applicant.
“This low interest rate environment was not the case a few years ago,” says Vijay Valecha, Chief Investment Officer, Century Financial.
“The benchmark interest rate in the UAE hovered around 2.25-2.5% in 2018, before the central bank’s decision to cut interest rates in 2019. In 2018, the mortgage interest rate average in the region was around 3.75-4.25%, while interest on personal loans would be much higher than current due to higher rates in the past. “
Who should explore this option?
Almost anyone who took out a mortgage in 2018 or before.
“If an individual had taken out a loan in 2018, when the EIBOR was hovering around 3.5% and given current low interest rates, refinancing the loan seems a viable choice when a borrower takes on a new one. to repay its existing debt., and the terms of the old loan are replaced by the updated agreement, ”says Valecha.
Don’t forget the early settlement penalty, he adds.
For personal loans, talk to your banker or financial planner about the type of savings that can be made.
A personal loan contract is shorter than a home loan. Only explore refinancing or buyout options after you factor in prepayment payments and the fees for processing the new loan deal.
What savings are expected?
Interest rates are an important part of a loan. Therefore, getting a loan at a lower rate will certainly have a significant impact on savings.
A 2018 loan with an EIBOR of around 3.5%, if refinanced with a current EIBOR of 0.5%, would save the borrower around 80% in interest charges.
Swamy explains: “If a person has a loan of 1 million dirhams for a term of four years at an interest rate of five percent, the aggregate amount of interest will be around 105,406 dirhams at the end of the term. the loan amount would be Dh 768,389 with a monthly IME of around Dh 23,029. “
“The revaluation of the loan after one year and the search for a product at a lower rate, say 4%, will make it possible to obtain the amount of the interest rate of 48,304 DH for three years. This is obviously 45% less than the amount of the overall interest rate that was expected. initially.”
Having a good credit rating helps
Credit score plays an important role for banks in assessing a borrower’s worth and key decisions such as interest rate and a person’s eligibility for a loan.
“The higher the credit score, the higher the chances of getting a loan with a low interest rate. When reassessing, it is the credit score and timely installment payments that will help negotiate the interest rate with the lender. A credit score gives the lender the assurance of timely payments, ”says Swamy.
Things to keep in mind
You can call your bank to ask if the current loan agreement can be revised, or if you are exploring options with other financial institutions, consider the costs involved in getting a new agreement.
“A redemption loan involves a processing fee and an early settlement fee from the existing lender. The loan holder must determine what the savings would be when the processing fee, early settlement fee is paid after getting a new loan. at a lower interest rate. Also, in the case of a repurchase loan, make sure that the new interest rate does not tend to increase after the welcome period, ”advises Swamy .
Valecha adds: “The refinancing movement usually translates into savings for the borrower. However, when refinancing a mortgage, there are a few fees to consider such as settlement fees to the old lender, property appraisal fees, mortgage opt-out fees. with the Dubai Land Department (if the property is in Dubai), mortgage registration fees, DLD title fees and any other miscellaneous fees.