April 16, 2024, 6:11 am | Read time: 4 minutes
When the house is only partially paid off and the fixed interest rate on the mortgage is about to expire, it’s time to act. It’s crucial to start thinking about refinancing.
Most home loans are initially set with a fixed interest rate for 10 or 15 years. When this period ends, you need to renegotiate and arrange a follow-up loan, as the entire loan amount is usually not yet paid off. This is a task some homeowners tend to postpone. However, proactive planning is essential when it comes to refinancing.
Don’t wait for the bank to contact you
“Homeowners shouldn’t wait for their bank to reach out,” advises Roland Stecher, a financial expert at the Bremen Consumer Center. Typically, the bank will only present a new offer three months before the fixed interest rate expires. “But that’s far too late to respond effectively,” says Stecher. It’s better to start considering market conditions two to three years in advance. This way, owners can estimate what their future loan payments might be.
Of course, it’s impossible to predict exactly what interest rates will be three years in advance. However, certain trends can be identified. “If mortgage rates are rising, it might be worthwhile to lock in the currently lower rate for refinancing,” says Mirjam Mohr, head of sales at the mortgage broker Interhyp. “If rates remain stable, waiting might be the more attractive option.”
According to the financing broker Dr. Klein, mortgage rates have noticeably decreased since the end of October 2023. They have now stabilized between three and four percent. This trend is likely to continue in the coming months.
“For homeowners who took out their loans 10 to 15 years ago, not much changes with refinancing now,” says Florian Becker, managing director of the Homeowners Protection Association in Berlin. Back then, interest rates were at a similar level to today. “They can essentially continue calculating with their usual payments,” says Becker.
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Is a forward loan worth it?
Those who fear that interest rates might significantly rise can secure current conditions five years before the fixed rate expires with a so-called forward loan. However, according to Mirjam Mohr, locking in rates this early is not economically sensible, as the interest surcharges usually negate any potential savings.
Background: Banks charge a monthly interest surcharge for forward loans. The closer the end of the existing loan’s fixed rate, the lower this surcharge. Currently, surcharges range from 0.04 percent per month of remaining term at the high end to 0.003 percent at the low end. Some banks no longer charge a surcharge from one year of remaining term. “The longer customers want to lock in the rate for their refinancing in advance, the more expensive it becomes,” says Mohr.
Switching banks can have many advantages
When the fixed rate ends, customers have the opportunity to look for the best conditions on the market. They are free to stay with their current bank or switch to another. “They should carefully examine the conditions of several providers, for example, using comparison portals,” says Florian Becker. “If the home bank offers good conditions but other banks offer even better ones, switching is worthwhile. Even interest differences of 0.1 or 0.2 percent can add up to several thousand dollars over 15 years,” says Becker.
According to Interhyp, switching banks has definite advantages. Customers can benefit from new customer conditions, and the property is re-evaluated. As property prices have generally risen significantly over the years and many owners have paid off a lot, the risk for financiers decreases and conditions improve. The re-evaluation of the property can improve the interest rate by up to 0.5 percentage points or more when switching banks. The costs for refinancing are usually only a fraction of the savings achieved through the lower interest rate.
Switching is also simpler than many fear. All that’s needed is a transfer declaration from the outgoing to the incoming bank to certify the transfer of claims. According to Florian Becker, only minor fees are incurred for re-registering the mortgage in the land register. However, owners should be aware that the new bank will reassess the borrower’s creditworthiness. If this could be an issue, it’s better to stay with the old bank, advises Becker.
With material from dpa