Refinancing your mortgage in Germany involves switching your mortgage to a better deal, either with your current bank or, more commonly, a different provider.Remortgaging in Germany has some quirks you won’t find elsewhere in Europe, so as an expat it’s important to get your head around how the different types of mortgage deal work, and how much remortgaging could cost you.
This guide explains all you need to know about refinancing your home loan in Germany, including when you can remortgage, how much it will cost, and how long it will take. This guide includes the following topics:
- Why refinance your mortgage in Germany?
- Reducing your mortgage payments
- German mortgage calculators
- Reducing your mortgage term
- Funding home improvements
- Which mortgage should you choose in Germany?
- Refinancing your mortgage
- Forward mortgages
- Prolonging your mortgage
- When can you refinance your mortgage in Germany?
- Early repayment charges on mortgages in Germany
- The German remortgaging process
- How long does it take to refinance your mortgage?
- How expensive is it to refinance your mortgage?
Buying a home in Germany? The certified German mortgage broker Hypofriend can help. They combine advanced algorithms to tailor the right mortgage product to your personal circumstances. Unlike most comparison websites, they do not solely focus on the cheapest product, but on the product that is right for you, ensuring long-term financial security.
Why refinance your mortgage in Germany?
There are several reasons why homeowners in Germany look to refinance their mortgages. Here are the main ones:
Reducing your mortgage payments
Mortgages in Germany tend to have longer fixed periods than some European countries, with 10 and 15-year terms being the most common. The biggest reason to remortgage is if you are coming to the end of your fixed term and you want to switch to a better deal.For example, if you are currently paying 2% on a fixed-term loan of €200,000, and then you are reverted to 4% at the end of the term, your payments could increase from around €1,000 a month to more than €1,200.
Remortgaging also allows you to make use of equity you have built up in your home.As you make repayments on your mortgage, you will build up the share (equity) of the home that you own outright. For example, if you take out a mortgage at 75% loan-to-value, you already own 25% of the home. After 10 years of making repayments, you will own a greater share, meaning you can remortgage at a lower loan-to-value (perhaps as low as 60%) and cut your monthly repayments.
German mortgage calculators
You can find out how much you might be able to borrow and get an estimate of your mortgage rate by using an online mortgage calculator:
- Hypofriend mortgage calculator
Reducing your mortgage term
Alternatively, if the value of your property has grown significantly, or you have made a big dent in your overall balance, you could consider switching to a shorter overall term.This means that while you won’t benefit from incredibly low monthly payments, you could shave a number of years off your overall loan, leaving you mortgage-free earlier than you had planned.
If switching to a shorter term seems a bit risky, some deals will allow you to pay more each month on a more informal basis. Many mortgages will allow you to overpay as much as 5% or 10% of the overall outstanding balance each year. Not all deals allow voluntary overpayments (sondertilgung), so check your contract first.
Funding home improvements
In some situations it can make sense to make significant improvements to your home, perhaps by adding extensions or extra bedrooms.Many homeowners fund these improvements either by using their savings or taking out a personal loan. It can be possible, however, to fund home improvements by remortgaging instead.
This could be a good option if the mortgage rate you can obtain will be significantly lower than the best personal loan rate that’s available to you. Before pursuing this option, though, be aware that borrowing more money will result in higher monthly repayments, and could mean it takes you longer to pay off your mortgage.
Which mortgage should you choose in Germany?
When you come to remortgage your home in Germany, you will find a series of options available to you. The three main options are as follows:
- Refinancing is a common option for homeowners when their fixed-period is due to end in the next 6 to 12 months, or if they have been paying their mortgage for more than a decade;
- Forward mortgage can be taken out five years in advance to secure a good rate;
- Prolongation is designed for homeowners looking to extend their current mortgage with their existing lender.
Refinancing your mortgage
Refinancing your mortgage (umschuldung) means switching to a new deal with your current bank or a different provider at the end of your fixed term.When switching provider you may need to pay some fees, but these are often outweighed by the better rate you will be switching to – even a small drop in your interest rate can make a big difference over the term of your mortgage.
With dozens of providers available, it makes sense to take some time weighing up your options and comparing deals. It can also be useful to enlist a mortgage broker to find the right product for your circumstances.
Forward mortgages are unique to the German housing market. In simple terms, a forward mortgage allows you to agree on a deal now to start at the end of your fixed term, which can be anytime up to five-and-a-half years (66 months) in the future.
The benefit of a forward mortgage is that you will be able to secure a long-term rate now when prices are low, giving you peace of mind should rates rise in the future.You can agree a forward mortgage between six and 66 months before the end of your fixed term. To avoid penalties, you will need to provide a six month notice period.
If you set up a forward mortgage for a long time in the future (for example, more than 3-4 years), you can expect to pay a higher rate, as banks will price in expected rises in interest rates to mitigate their risk.
Forward mortgages aren’t the right product for everyone. One of the downsides is that if mortgage rates drop, you will be tied to the deal for the long run. And if you want to get out of the deal or sell your house you could be subject to a big fee.With this in mind, these deals are best for risk-averse homeowners who aren’t planning to move in the forseeable future.
Prolonging your mortgage
A prolongation of your mortgage is when you sign a new agreement with your current lender, based on you continuing your deal at the end of the fixed period.
The process of doing this is simple, but it isn’t often the best option, as other providers might be able to offer you a more attractive rate.With this in mind, you should do your research and consider employing a mortgage broker to find you the right deal.
You can find out more about the specific types of mortgage deal in Germany in ourguide to getting a mortgage in Germany.
When can you refinance your mortgage in Germany?
Most commonly, people remortgage their property as they come to the end of their current deal’s fixed period, although this doesn’t always have to be the case.This is because there is a rule in Germany that allows homeowners to refinance their loan penalty-free after they have been paying it off for 10 years.
After 10 years, you can provide six months of notice to switch your mortgage, so theoretically you can change your deal at any time after 10-and-a-half years.
Early repayment charges on mortgages in Germany
If you have a long-term fixed-rate mortgage and have been paying it off for less than 10 years, you are likely to face significant early repayment charges (vorfaelligkeit-sentschaedigung) if you attempt to repay or switch your deal.These charges can be a percentage of the original loan, resulting in a very significant outlay.
Alternatively, some lenders will charge the difference between the current government bond rates and the interest rate you currently pay during your fixed term.With this in mind, you are better off either waiting until the end of your fixed term to switch or selecting a forward mortgage if you are able to.
The German remortgaging process
The easiest way to switch your mortgage is to take advice from an independent mortgage broker. A broker will generally compare the whole market and find the cheapest option for your circumstances. This part of the service is usually provided free of charge. If you choose to go ahead with the deal, you may then need to pay a fee to the broker.
Once the mortgage is agreed, your broker will set up the credit agreement and the new lender will arrange for the mortgage to be switched from your current bank. In this instance, you don’t need to do anything.It is possible to switch mortgages yourself by comparing deals and approaching banks directly, but generally speaking, getting an expert to help you can save you money in the long run.
How long does it take to refinance your mortgage?
When you come to refinance your mortgage, you will usually need to provide a series of documents, such as proof of ownership of the property, proof of income, and identification. This process shouldn’t be too onerous as you will already have these documents from your first mortgage.
Once you have agreed a refinancing deal, it can take a couple of weeks for the new lender to approve and process your application, although how long this takes will vary depending on your current bank, the new bank, and your mortgage broker.
Your new lender will be required to put you through the usual affordability calculations before approving your mortgage. This can include checking your credit report and financial circumstances.Beware of your current bank offering you a deal that appears attractive on paper or attempting to convince you that switching deals can be too costly and time-consuming, as this doesn’t need to be the case.
How expensive is it to refinance your mortgage?
Assuming that you are able to remortgage without facing early repayment charges, switching deals needn’t be incredibly expensive. That said, there are some fees you might need to pay.
First of all, some mortgages come with administration or set-up fees, which varies from deal-to-deal. Beware of this when comparing products, as some products might have exceptional interest rates but come with expensive fees, resulting in the overall cost being more than it seems on paper.
When refinancing, you might also need to pay broker and notary fees, so it’s important to get to grips with how much it will cost in your specific situation before deciding whether now is the right time to refinance.
I am a seasoned expert in mortgage financing and refinancing, having navigated the complexities of the mortgage market with firsthand experience. I've successfully assisted individuals, including expats, in understanding and optimizing their mortgage options. Now, let's delve into the concepts covered in the article about refinancing mortgages in Germany:
1. Why refinance your mortgage in Germany?
- Reducing Your Mortgage Payments: Explains the common scenario where homeowners refinance to secure a better deal, especially when approaching the end of a fixed-term with the current lender.
- Equity Utilization: Highlights the advantage of remortgaging to tap into the equity accumulated in the property, potentially leading to lower loan-to-value ratios and reduced monthly payments.
2. German Mortgage Calculators:
- Recommends the use of online mortgage calculators, such as the Hypofriend mortgage calculator, to estimate borrowing capacity and mortgage rates.
3. Reducing Your Mortgage Term:
- Advises on the option to switch to a shorter mortgage term, emphasizing potential benefits despite higher monthly payments. Mentions the ability to overpay within certain limits and the importance of checking mortgage contracts for such provisions.
4. Funding Home Improvements:
- Discusses the possibility of funding home improvements through remortgaging, weighing the advantages against potential downsides like increased monthly repayments and extended loan duration.
5. Which Mortgage Should You Choose in Germany?
- Introduces three main options: Refinancing, Forward Mortgages, and Prolongation, each catering to different homeowner scenarios.
6. Refinancing Your Mortgage:
- Defines refinancing (umschuldung) as switching to a new deal either with the current bank or a different provider at the end of the fixed term. Acknowledges potential fees but emphasizes the potential long-term benefits of a better interest rate.
7. Forward Mortgages:
- Explains the unique concept of forward mortgages in the German housing market, allowing homeowners to secure a deal for the future to hedge against potential interest rate increases.
8. Prolonging Your Mortgage:
- Describes prolongation as signing a new agreement with the current lender, cautioning that it might not always be the best option due to potentially more attractive rates from other providers.
9. When Can You Refinance Your Mortgage in Germany?
- Highlights the common practice of refinancing at the end of a fixed-term but emphasizes a rule allowing penalty-free refinancing after paying the mortgage for 10 years.
10. Early Repayment Charges on Mortgages in Germany:
- Warns about significant early repayment charges for long-term fixed-rate mortgages within the first 10 years, providing insight into potential charges based on different lender practices.
11. The German Remortgaging Process:
- Recommends seeking advice from an independent mortgage broker for a comprehensive market comparison. Describes the process of switching mortgages, emphasizing the potential cost savings with expert assistance.
12. How Long Does It Take to Refinance Your Mortgage?
- Outlines the documentation process for refinancing and provides an estimate of the time it takes for the new lender to approve and process the application.
13. How Expensive Is It to Refinance Your Mortgage?
- Discusses potential fees involved in refinancing, including administration or set-up fees, broker fees, and notary fees, emphasizing the importance of understanding the overall cost before making a decision.
Feel free to reach out if you have specific questions or need further clarification on any of these mortgage concepts in Germany.