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Whether you want to lower your monthly payments or pay off your home loan faster, this guide to mortgage refinancing in Germany explains the process and costs of changing your mortgage contract.
Mortgage Loan Germany
Refinancing your mortgage in Germany involves changing your mortgage to a better offer, either with your current bank or, more often, with another provider. Remortgaging in Germany has some drawbacks that you won’t find elsewhere in Europe, so as an expat it’s important to find out how the different types of mortgage contracts work and how much remortgaging will cost you.
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This guide explains everything 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 covers the following topics:
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There are several reasons why homeowners in Germany want to refinance their mortgages. Here’s the gist:
Home loans in Germany have longer fixed terms than in some European countries, and the most common terms are 10 and 15 years. The biggest reason to remortgage is if you’re nearing the end of your fixed term and want to switch to a better deal. For example, if you are currently paying 2% on a €200,000 term loan and then switch back to 4% at the end of the term, your payments could rise from around €1,000 to more than €1,200 per month.
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A remortgage also allows you to tap into the equity you’ve built up in your home. When you pay off your mortgage, you build equity (equity) in your property. For example, if you take out a 75% loan-to-value mortgage, you already own 25% of the home. After 10 years of repayments, you’ll have more equity, which means you can remortgage at a lower loan-to-value ratio (perhaps as low as 60%) and lower your monthly payments.
Using an online mortgage calculator, you can find out how much to borrow and estimate your mortgage rate:
Alternatively, if the value of your property has increased significantly or you have breached the overall balance, you can switch to a shorter term. This means that while you won’t enjoy incredibly low monthly payments, you may be able to shave a few years off your total debt, leaving you with a mortgage sooner than planned.
If moving to a shorter term seems a bit risky, some contracts will allow you to pay more each month on a more informal basis. Many mortgages will allow you to pay 5% or 10% of the total balance each year. Not all jobs allow voluntary overpayment (
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In some situations it may make sense to make significant improvements to your home, perhaps by adding an extension or extra bedrooms. Many homeowners finance these improvements either by using their savings or by taking out a personal loan. However, it is possible to finance home improvements with a remortgage.
This can be a good option if the mortgage rate you can get is significantly lower than the best personal loan rate available to you. However, before using this option, be aware that borrowing more money will result in higher monthly payments and may mean it takes longer to pay off the mortgage.
When looking for a mortgage for your home in Germany, you will find a number of options available to you. There are three main options:
) means switching to a new contract with your current bank or other service provider at the end of your fixed term. You may have to pay some fees when you switch providers, but these are often outweighed by the better rate you’ll be switching to – even a small drop in your interest rate can make a big difference to your mortgage term.
How To Refinance Your Mortgage In Germany
With dozens of service providers available, it makes sense to take some time to weigh your options and compare offers. It may also be useful to consult a mortgage broker to find the right product for your circumstances.
Term mortgages are unique to the German real estate market. Simply put, a term mortgage allows you to agree to a contract now that will start at the end of your fixed term, which can be anywhere up to five and a half years (66 months) in the future.
The advantage of a term mortgage is that you can secure a long-term interest rate now when rates are low, giving you peace of mind if rates rise in the future. You can arrange a term mortgage from 6 to 66 months in advance. End of your mandate. To avoid penalties, you will need to give six months’ notice.
If you set up a term mortgage for a longer period of time in the future (for example, more than 3-4 years), you can expect to pay a higher rate, as banks estimate the expected rise in interest rates to reduce their risk.
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A term mortgage is not the right product for everyone. One downside is that if mortgage rates fall, you’ll be tied to the job for the long term. And if you want to go out of business or sell your home, you may be charged a hefty fee. With that in mind, these deals are best for risk-averse homeowners who aren’t planning on moving anytime soon.
A mortgage extension is when you sign a new contract with your current lender that will see you continue your business at the end of a specified period.
The procedure for this is simple, but it is often not the best option, as other service providers may offer you a more attractive price. With this in mind, you should do your research and consider using a mortgage broker. You are the real deal.
You can find out more about certain types of mortgage contracts in Germany in our guide to getting a mortgage in Germany.
Getting A Mortgage In Germany
People most often remortgage their property when the fixed term of the current contract is coming to an end, although this is not always the case. That’s because Germany has a rule that allows homeowners to refinance their loan without penalty after 10 years of payments.
After 10 years you can give six months notice to change your mortgage, so in theory you can change your contract anytime after 10 and a half years.
If you have a long-term fixed-rate mortgage and pay it off in less than 10 years, you’re likely to face significant prepayment charges (
) if you are trying to cancel or change your transaction. These fees can be interest on the original loan, resulting in a very significant cost.
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Alternatively, some lenders will charge the difference between current government bond rates and the interest rate you currently pay over your fixed term. With that in mind, it’s best to wait until your fixed appointment changes or opt for a transfer. A mortgage if you can.
The easiest way to switch mortgages is to get advice from an independent mortgage broker. Generally, a broker will compare the entire market and find the cheapest option for your circumstances. As a rule, this part of the service is free. If you decide to proceed with the transaction, you may have to pay a commission to the broker.
Once the mortgage has been agreed, your broker will draw up a loan agreement and the new lender will arrange a mortgage switch from your current bank. In this case, you don’t have to do anything. It’s possible to switch mortgages by comparing offers yourself and contacting banks directly, but generally speaking, finding a specialist will help you save money in the long run.
When you go to refinance your mortgage, you will usually need to submit a number of documents such as proof of ownership of the property, proof of income and identification. This process should not be too tedious as you will already have these documents from your first mortgage.
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Once you’ve agreed to a refinance agreement, it may take a few weeks for the new lender to approve and process your application, although how long this takes will depend on your current bank, the new bank and your mortgage broker.
Your new lender will need to make the usual calculations of your affordability before approving your mortgage. This may include checking your credit report and financial circumstances. Beware of your current bank offering you a job that looks attractive.
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