Do you want to secure a favourableinterest rate for the future by refinancing your mortgage?
As mortgage interest rates in Germany are expected to rise by another 0,75% or 1% within the next year, an increasing number of people are now looking for favourable follow-up financing for their mortgage loans.
We’ve put together a guide on everything you need to know about switching your mortgage and securing good refinancing rates for the future. In it, we explain why it makes sense to think about remortgaging, when you should refinance, how much it costs and what options you have.
Why refinance your mortgage?
Refinancing your mortgage basically means trading in your old mortgage for a new one. This can be done either with your current bank, or, more commonly, with a different provider. There are several reasons why refinancing your mortgage can be beneficial. Two of the main reasons are 1) it may come with the benefit of a lower interest rate; and 2) it can help you shorten your payment term.
Lowering your interest rate
Probably the biggest and most common reason to remortgage is to get a better deal as you are coming to the end of your fixed interest rate period. For instance, if you are currently paying an interest rate of only 1%, and the upcoming new fixed interest rate at your existing mortgage bank is much higher at 4%. This would mean a substantial increase in your monthly repayments, and is not an unlikely scenario at the current steadily increasing interest levels. If you are worried that you might get stuck with high interest rates once your fixed term ends, you should consider finding alternative refinancing options with an another lender.
Shorten your mortgage term
Another reason why refinancing your mortgage could be beneficial is if you are considering shortening your entire loan term. For example, you may have agreed on a 10-year fixed period mortgage with low monthly repayments resulting in a long overall term. During the course of the first 10 years, your circ*mstances may change, meaning that you now have more surplus income than before. On the newly refinanced loan, you could arrange to have a higher monthly repayment resulting in a shorter overall loan term.
Mortgage tip: If you’re not comfortable with the idea of locking in a higher tilgung (repayment rate) on the newly refinanced loan, most mortgage providers allow you to overpay as much as 5% to 10% of your outstanding balance per year (this is called Sondertilgung), thus giving you the option to pay larger lump sums which will in turn reduce your outstanding balance and loan term.
The three different refinancing options
There are a few different options when it comes to refinancing your home, some of which make more sense than others, depending on your personal circ*mstances. Below we describe the most important options you should know about.
- Refinancing: You can apply for this type of remortgage agreement at the earliest 6 to 12 months beforehand. It is a common option chosen by people whose fixed rate is coming to an end in the upcoming months.
- Forward Mortgage / Forward loan: The advantage of this option is that it can be taken out up to 5 years in advance of your fixed period coming to an end with most lenders. This is a particularly good option if interest rates are expected to rise in the long term.
- Prolongation: This agreement extends your current mortgage with your existing lender.
Refinancing explained
When the fixed-interest period of your current loan is due to expire, you have the option of entering into a new contract with a different lender. The new lender then replaces the mortgage loan at the end of your fixed term, which is called “refinancing”. From then on, you will make your monthly repayments to the new lender, at the agreed new rate. Bear in mind though, that this type of refinancing only makes sense when coming to the end of your fixed-interest period. Otherwise, if you were not yet finished your fixed period, you would be charged an early repayment penalty to exit your existing loan contract early, and this can be expensive!
The main advantage of a refinancing agreement is that it offers you a great opportunity to negotiate significantly better interest conditions. Although the effort to switch lenders is somewhat greater than staying with your initial mortgage provider and may come with some additional fees, these will most likely be outweighed by the better new interest rate you will be switching to.
Forward loans explained
While interest rates are still relatively low, you may want to think about how to take advantage of the current conditions, even if the end of your fixed term lies a few years in the future.
The so-called forward loan gives you an option to do just that. The idea behind this type of contract is that you can lock in your interest rates far ahead of the start of your mortgage term – sometimes up to five years – securing a favourable fixed interest rate well ahead of time.
This guards your new mortgage against the possibility of rising interest rates in the future and offers a huge advantage over conventional refinancing, which you can only apply for 6 to 12 months beforehand.
How it works: As soon as the fixed-interest period of the initial lender ends, the new bank transfers the remaining debt to the initial lender and takes over the loan. As a borrower, you pay the remaining debt with the new bank at the pre-agreed, favourable interest rate.
The potential disadvantage of locking your new mortgage rate years into the future is that it’s hard to estimate what interest rates will look like in five years’ time. If interest rates drop contrary to expectations, you will still be obligated to take the loan at the pre-agreed rate. Aside from that, forward loans also require you to pay a small interest premium, which usually lies slightly above current conditions. The longer the start date of your forward loan is in the future, the higher the premium rate you can expect to pay.
Thus, when choosing your forward loan, you should pay particular attention to 1) the interest premium; 2) the interest rate; and 3) the length of lead time.
When can you refinance your mortgage in Germany?
The best options are to refinance your mortgage when coming to the end of your fixed-term contract or by securing a forward loan up to five years in advance of the end of your fixed period. Otherwise, if you try to switch your deal before the end of your existing fixed period, you are likely to face significant “early repayment charges”.
However, there is one exception to this rule in Germany. If you have a fixed period that is longer than 10 years and you’ve been paying off your loan for more than 10 years you are allowed to refinance your loan penalty-free. All you have to do then is give six months’ notice to the existing mortgage provider.
What does it cost to refinance your mortgage?
When thinking about refinancing your mortgage, there is only one fee that you will definitely have to pay. This is a small fee of 0,2% for updating the Grundbuch with the new banks details and can be included in the amount to be financed. An addditional two fees may come into account under certain circ*mstances, so you should be aware of them also: 1) early repayment charges; and 2) interest premiums.
As already mentioned, if you want to exit your existing contract before finishing your fixed period, you will have to pay significant fees unless the agreement is over 10 years old. These charges can be a percentage of the original loan, which can get very expensive very quickly.
The other cost you should be aware of relates to forward loans. If you secure a forward mortgage a few years in advance of your fixed period ending, you can expect to pay a higher interest premium on it, as banks will try to mitigate their risks by pricing in expected interest rate rises.
Remortgage with us today!
With many different providers available, it makes sense to take some time to weigh up your options and compare deals.
At My Mortgage Germany, we will assist you in securing the perfect refinancing deal at the best, low interest rate! Get in touch with our team of experts today or use our My Mortgage planning toolto get started on your refinancing journey.
