The following article will deep dive into your follow-up financing options as a German mortgage owner. In Germany, there are three main forms of refinancing options, we will describe each in the following article below:
A Forward Mortgage (with any lender)
A Refinancing (with a new lender)
A Prolongation (with your current lender)
A Forward mortgage is relevant if your fixed interest period is going to end between 6-12 and 66 months. Refinancing is relevant if your fixed interest period is going to end within 6-12 months or if you have been paying your mortgage for more than 10 years. A prolongation is relevant if you intend to extend your mortgage contract with your current lender.
Am I eligible to refinance my mortgage?
If you have been paying your mortgage for more than 10 years, you are free to refinance when you like. German law (§489) stipulates that you are eligible to cancel your mortgage contract and switch your mortgage to a different lender who may be able to offer you a mortgage at a much lower interest rate. If you would like to refinance your mortgage but you still have a number of years on your contract, you may be required to pay Pre-payment penalties called vorfaelligkeitsentschaedigung. For example: You closed a mortgage in May 2008 at 4% with a 15 year fixed interest period, that implies that you will be required to refinance the remaining loan balance in May 2023. However, as of today in June 2018 you would have been paying your mortgage for over 10 years, hence you are eligible to use your right to cancel your mortgage contract and switch providers. Please note, that you have a two week cancellation period and for fixed interest periods over 10 years, the new mortgage can only go into effect 10,5 years after the first mortgage payment was made. In this example, you would cancel your contract with your current provider and find a new lender from November 2019 onwards.
If you have been paying your mortgage for less than 10 years, banks will have you pay a large prepayment penalty whether you switch to a new lender or stay with them. As interest rates are so low now, it will require a very sizable outlay, making it hard for many people to refinance. That means you are better off waiting or looking into a Forward Mortgage.
If you lock in a low rate you may be able to save considerably. You can save in three ways:
You can make use of the current low interest rates
You can use your down payments to receive a better deal. As you have made down payments, your LTV (loan to value ratio, the value of the loan compared to the value of your house) ratio will decrease over time allowing you to borrow at a cheaper rate.
Finally, as the value of your property has risen, the LTV decreases even further.
Banks will typically not automatically give you a better rate if you stay with them. Many banks in Germany also charge very high mark-ups. It can therefore often pay off to shop around for a better mortgage.
Is it necessary to refinance my current mortgage or lock in a Forward Mortgage?
This depends on your personal situation. Experts, like Christian Mulder, former Economist at the IMF and Cofounder of Hypofriend agrees that rates are most likely to increase over the next few years. "The risk of increasing rates is likely to go up over time. Locking in current low interest rates provides you security against the risk of future steep increases. If you lock in now you will pay somewhat higher rates than are prevailing at present, as the market and the Banks do expect the rates to increase and they will want some compensation for that. But those rates are nonetheless very attractive. So typically if you have a high mortgage balance left you do not want to risk an extra steep increase. This is of course a personal decision, that you need to weigh carefully."
In general, you are better off deciding early as paying the mortgage off penalty free is tricky. Be careful that banks don't “trick” you into delaying the time at which you can do a penalty free mortgage by offering you a seemingly attractive lower interest rate. In either case you may not have the time or the energy when that happens to shop around.
How much can I save if I refinance my current mortgage?
The amount of money you could save by refinancing your current mortgage depends on the rate on your current mortgage and on the residual debt that you currently still have. The savings can be considerable as current interest rates are at or near historic lows.
How do I transfer my existing mortgage to a different mortgage provider?
Transferring your current mortgage from one bank to another is much easier and less complicated than most people think. After you have calculated your potential savings using Hypofriend’s calculator, one of our mortgage experts gets in touch with you to discuss your best refinancing option. After discussing what is best for your personal situation, the expert will then immediately start working on your application to refinance your mortgage. Depending on your situation, the expert will then go through a checklist of documents (e.g. purchase contract, proof of income etc.) which are necessary to switch to a new mortgage provider. Typically, from the first mortgage they signed, most applicants already have the majority of their documents ready. This means that there is little extra effort required on your part. After you have provided all documents and they have been checked by our expert, you don’t have to do anything else.
How long does it take to refinance my mortgage?
After you have shared all the necessary documents with our expert, it takes approximately 2 weeks before the new mortgage lender has processed and approved your mortgage application. However, in some cases it can actually take less than 2 weeks if all your documents are in order and there is no need for our expert to ask you for missing documents. We at Hypofriend pride ourselves with such a quick turnover.
Is it better to refinance my mortgage with a new bank or stay with my current bank?
It is possible to stay with your current lender if you are looking to refinance. However, refinancing with the lender that you are already have a mortgage with means that you are most likely missing out on a more attractive refinancing deal with a lower interest rate by not comparing other lenders. Many lenders have their clients believe that it is too costly and too time-consuming to switch their mortgage to another lender. Hypofriend can show you the best offers in the market and a mortgage expert can help you evaluate if refinancing makes sense or not.
Does the new lender check my credit score if I refinance?
Yes, when you are looking to refinance your mortgage with a new lender, they are required to request your credit score to see if you are eligible for a new mortgage. This is a typical step with every new mortgage and every applicant has to go through it. Hypofriend makes this step easy as all you have to do is to electronically send our mortgage expert all the necessary documents. After that, our experts take over and provide the new lender with your documents so that they can approve your mortgage as fast as possible.
What is a Forward mortgage?
A Forward mortgage is a form of follow-up financing. You and the new mortgage lender agree on an interest rate for your new mortgage that starts up to 5,5 years from now. It is as simple as that. It is a unique feature of the German mortgage market that is wonderful for the borrower. It allows you to secure today’s low interest rate years before your existing mortgage finishes. This means that by the time your current mortgage ends, you won’t have to worry about a potential increase of interest rates because you already secured a follow-up financing at a low interest rate several years earlier.
How long does it take to close a Forward mortgage?
Typically, it takes a few weeks to close a Forward mortgage. If you decide to close a Forward mortgage with your current bank, this process will be shorter as the bank does not need to check your documents again. When applying for a Forward mortgage at a different bank, it can 2-3 weeks before your Forward mortgage is finalised and ready to sign. In most cases, it makes sense to switch to a different as this gives you the liberty to choose the most attractive Forward mortgage deal out in the market.
How many years before my current mortgage ends can I close a Forward mortgage?
It is possible to close a Forward mortgage up to 66 months before the end of your current mortgage. With current interest rates the most attractive deals on Forward mortgages can be attained up to 45 months before the end of the current mortgage--the savings locked in will be relatively high. But you need to check with our advisors or obtain access to Hypofriend's Forward mortgage tool to get a better assessment of the financial benefits and risks.
When will the new Forward mortgage take effect?
There is a 6 months notification requirement to make use of the penalty free refinancing. So the penalty free new mortgage takes affect a minimum 10 ½ years after you obtained the mortgage.
How long will the fixed interest rate period of the Forward mortgage run?
This depends on the length of the fixed interest period you choose. If you choose a 10 year fixed interest rate period and if you take the earliest opportunity for a FWD, your new mortgage fixed interest period will run from year 10,5 till year 20,5. In year 20,5 you can again refinance penalty free.
How high is the Forward rate when closing a Forward mortgage?
Forward rates are at this moment higher than current rates as markets expect interest rates to go up. In the Forward rates there is also a credit risk premium and any profit margins of the bank's embedded. We at Hypofriend present the lowest cost option for standard characteristics. The savings estimates can be fine-tuned by using personal characteristics, notably your LTV ratio. We recommend to fine tune the savings estimates with the mortgage advisor. re also small fees embedded, but we present all in costs.
What are downsides to closing a Forward mortgage?
Nothing is risk-free. 1. It could be that interest rates decline further or don't rise as the market expects. Then you would have been better of with waiting. 2. If you sell the house before the end of the fixed interest period, then you may have to pay a penalty if interest rates are lower and the bank makes a loss.
This underscores that the forward mortgage is especially suited for people who: 1. are pretty sure they will keep their house for a long time; 2. have a high mortgage compared to their income so they cannot afford the risk that interest rates increase somewhere in the future; 3 and those that are really risk averse and "hate" to take the risk of spending more on their mortgage.
Do I have to pay a prepayment penalty when refinancing with a Forward mortgage?
No. When you decide to secure today’s low interest rate with a Forward mortgage, you will not have to pay a prepayment penalty. Prepayment penalties are only paid when you decide to terminate your existing mortgage before the end of the contractually agreed period. Banks use the prepayment penalty to compensate for the losses of interest payments that they miss in case that you decide to terminate your mortgage prematurely.
Do you have more questions about whether refinancing is right for you? Then please don't hesitate to make an appointment with one of Hypofriend's trusted mortgage advisors: