In developed markets, refinancing of a commercial property is common practice for various reasons. How does it reflect in Indian real estate and what are the benefits that entail?
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  • The practice of refinancing a commercial property started in the western and some Asian countries, including India, have started experimenting with it too. For a business, refinancing offers a host of advantages owing to the fact that it involves paying off an existing loan and then taking a new one at a better of rates interest, to begin with.
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  • Refinancing lowers the cost of borrowing by letting you opt for a loan lower interest rates from a bank or NBFC, and paying off the existing loan. It further enables you to save more money by the difference between the old and new interest rates. The transition from higher rates to lower rates is very much possible nowadays owing to existing low interest offers from banks and NBFCs.
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  • @Malvish yes, that is one obvious benefit I suppose. But how much is the difference in rates? Is it good enough?
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  • Refinancing an existing commercial loan can help save as much as between 100-200 basis points in interest rates and that can be a whole lot of money saved.
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  • How much difference that 100-200 basis points actually make in a commercial loan?
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  • The percentage term for 100 basis points is 1%.
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  • Refinancing an existing commercial loan also allows the borrower to opt for a shorter repayment period.
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  • How does a shorter repayment tenure help in the real sense? I know it does but just for the sake of detailing.
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  • Well, the interest component in EMIs is highest in the first few years of the repayment period of a loan. In a long term loan, the principal amount get's repaid in later years of the repayment tenure. In a short term loan the interest amount paid will be less, also ensuring that the overall outgo remains even lesser than that in a long term loan.
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  • @Malvish Okay, so the overall payment for a shorter-term loan gets lower.
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  • People servicing more than one loan on multiple commercial properties from different banks can benefit by consolidating their loans and getting them all financed by a single bank or NBFC at lower rates and more favourable conditions.
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  • Refinancing multiple commercial loans from a single bank or NBFC allows the borrower to consolidate all the existing loans and focus on a single bank for repayment, making it much cheaper and easier than paying to multiple banks on higher lending rates and different repayment dates.
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  • Borrowers of a commercial loan can free up equity and use it as working capital for other purposes by paying off an existing debt on a commercial property.
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  • Also, floating interest rates can be a burden. So a new loan migh help.
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  • Yes! Floating interest rates are very volatile and can increase the burden of EMIs considerably. Refinancing such a commercial loan with a fixed-rate loan can help control the volatility and help save money for other purposes or businesses.
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