Refinancing an existing loan for a commercial property is a practice that started in the western world and has caught on in many Asian countries including India, for some time now. Refinancing offers a host of advantages for a business and with the evolving financial market, it is a fairly common practice nowadays. Refinancing a commercial mortgage is basically replacing an existing loan with a new one. In other words, it involves paying off an existing loan and then taking a new one at better rates or terms and conditions.
Here are the top five reasons why refinancing makes sense and why you should go for it:
1. Lower your cost of borrowing
Refinancing often results in lowering the cost of borrowing. If you get a lower interest rate from a bank or NBFC, you can pay off the existing loan and opt for another one at a lower interest rate. This will leave you with more money in your hands by way of substantial savings in interest rates. The transition from higher rates to lower rates is especially possible in times like these when there is a low interest rate regime. A saving of 100-200 basis points in interest rates can result in a lot of money in your hand.
2. Lower tenure of loan repayment
You can go for a new loan with a shorter repayment period. If you have an existing loan with a repayment period of 20 years and do not want to service that loan for 20 years, a new loan with a shorter duration can be taken. It is well-known that the interest component in EMIs is highest in the first few years of a loan repayment period. If you keep the longer loan, the actual principal amount will get repaid in later years of the tenure of the loan. If you choose a new loan with a shorter duration, then the amount that you will pay as interest through EMIs will be lower. Hence the overall outgo to service the shorter-term loan, will be lower.
If you have many commercial properties and are servicing several different loans, then choosing one bank or NBFC and getting refinancing from it for all your properties, can be advantageous since this one bank or NBFC that you choose may be willing to offer more favourable terms and conditions as it will get a bulk deal. This is called the consolidation of loans. Dealing with just one entity on a monthly and yearly basis for all your properties will be easier for you also.
4. Equity recovery
Paying off an existing debt on a commercial property can be a useful means to recover equity. You can free up equity in the form of cash and use it as working capital for any of your businesses.
5. Control volatility
Floating interest rates can take up or bring down your EMIs considerably, making your financial burden volatile. Moving to a fixed-rate loan will require refinancing and can help you control volatility in business operations and servicing any other debt or debts that you may have in your business.