Refinancing Your Mortgage: What Is refinancing and how does it work?

What does it mean to refinance a mortgage?

In order to realise the dream of owning your own home, in most cases you will require financing that comes with a fixed term and fixed interest rate. It is not uncommon for the property loan not to be fully paid off at the end of the fixed interest period, meaning refinancing is necessary. In this case, apartment owners renegotiate with the bank or credit institution, ideally before the fixed interest rate expires. This is described as an extension offer, or a renewal. Refinancing is not necessarily a loan modification. However, it is also possible to refinance the debt with a new lender or to take out a forward loan.

How to refinance your loan

There are various types of financing options on the market. For this reason, it is worthwhile to compare them. If you make this comparison in good time, you have a better chance of getting a loan at favourable conditions. Usually, the bank will send you a prolongation offer three to six months before the fixed interest rate expires. As a homeowner, you should not wait long to secure an interest rate. Interest rates have already been at a historic low for some time. This creates optimal conditions for choosing the best home refinancing options.

When is refinancing worthwhile?

Unless you've taken out a loan for the maximum number of years and intend to pay it off over decades (which is generally unadvisable, due to the interest rates being higher, inflexibility, and potential losses), chances are you will need to refinance your loan when the terms of your original contract are up. This means that most of the time, it is worth it to refinance your home. You can also choose to refinance your loan anytime after ten years from the start of your contract. German law (§489) states that borrowers are eligible to switch mortgage contracts or change to a different lender with more favourable conditions. However, you could be liable for pre-payment penalties. That being said, now is an especially a good time to look into refinancing options, due to the fact that interest rates in Germany are at a historical low.

The best refinancing options for you

A forward mortgage is relevant for those whose fixed interest periods are going to end anywhere between 6 and 66 months. If you have been paying your mortgage for less than 10 years, most of the time banks charge a considerable prepayment penalty if you choose to switch to a new lender. Since current interest rates are so low, this requires a large outlay, meaning that for many, refinancing before ten years is unattainable. However, the forward mortgage is an excellent alternative. This type of loan allows borrowers to take out financing with the bank at an agreed point in time. For most people, a forward mortgage is the best option, unless your current loan allows for large early repayment sums (called Sonderntilgung). No interest is payable before this occurs, but the interest rate is based on the current interest rate level. However, banks charge a premium for each month of delay. If the interest rate is expected to fall, they will grant the forward loan without a surcharge. This form of loan is therefore particularly recommended if interest rates are expected to rise.

Refinancing with KfW

If you would like to take out refinancing with KfW for your apartment, it depends on your current credit situation. KfW does not grant loans for debt restructuring, which is why this form of financing is not an option if the previous financing was with another credit institution or bank. However, if a KfW loan is already in place, the refinancing can be provided without any problems. In this case, however, the term of the contract usually extends beyond the expiring fixed interest rate period, so you are obliged to accept the conditions of refinancing from KfW. This is similar to an extension offer and can only be understood as refinancing in the broadest sense.

How to apply for refinancing

When you take out a loan in Germany, you must submit documents about your personal circumstances as well as about the object for which you require financing. This includes proof of income, if applicable proof of equity and the tax assessment, an annual account statement of the previous loan and - if available - proof of other income, such as rental income. In addition, there is the current extract from the land register, a cadastral map or a site plan, construction drawings and calculations for the property and, if applicable, photos. For apartments, a declaration of partition must also be enclosed. There are various options for taking out refinancing after 10 years or even earlier after a property loan has expired. It is important to deal with this early on, calculate offers for follow-up financing and make a well-founded comparison. This form of loan offers an opportunity to adjust monthly instalments to your current financial and/or personal situation. By comparing offers, it is possible to save several thousand euros. Therefore, it is important to take enough time for the calculation. If the property loan has not yet been paid off when the fixed interest rate expires, then refinancing is an option. With our help, you can get the best refinancing options and benefit from potentially lucrative savings through interest rate hedging. Contact us below so we can help you get started.