How to refinance your German mortgage?

How to refinance your mortgage 

When the fixed-interest period of your mortgage comes to an end, it's time to refinance. In Germany, you have three options: 

1. A Forward Mortgage (with any lender)

2. A Refinancing (with a new lender) 

3. A Prolongation (with your current lender)

A forward mortgage is relevant if your fixed interest period is going to end between six and 66 months. Refinancing is relevant if your fixed interest period will end within six months or if you have been paying your mortgage for more than ten 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 ten years, you are free to refinance when you like. German law (§489 BGB) 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 still have a number of years on your contract, you may be required to pay prepayment penalties called “Vorfälligkeitsentschädigung.”

Example: You closed a mortgage in May 2014 at 4% with a 15-year fixed interest period. That implies that you will be required to refinance the remaining loan balance in May 2029. However, as of June 2024, you would have been paying your mortgage for over ten years. Hence, you are eligible to use your right to cancel your mortgage contract and switch providers. 

Please note: You have a two-week cancellation period, and for fixed interest periods over ten 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 could find a new lender from November 2024 onwards.

If you have been paying your mortgage for less than ten years, banks will have you pay a large prepayment penalty whether you switch to a new lender or stay with them. The prepayment penalty broadly depends on how high the interest rate on your loan is compared to the current rate on a government bond with the same remaining maturity. If the penalty is high you are typically better off waiting.

For example: If your mortgage rate is 2%, and you have 3 years left on your mortgage, and the 3-year government bond yields 2%, you will face no penalty. The logic behind the penalty is that you have to compensate the bank for the loss they make due to the early repayment.

For many people the penalty now is low or non-existent as interest rates have increased. But that also means it is less obvious that can gain with a refinancing.

If the current German government bond rates are low rate compared to the rate on your mortgage, you may be able to save, and more then you think. You can save in three ways:

1. You can make use of the lower interest rates. But keep in mind you do pay a mark-up over the government bond rates.

2. You can receive a better deal. As you have repaid part of your loan already, your LTV (loan-to-value ratio, the value of the loan compared to the value of your house) ratio has decreased, you will be able to borrow at a cheaper rate.

3. Finally, as the value of your property has risen, the LTV decreases even further. 

Hypofriend advisors can help you calculate if it makes sense now, or if it is better to wait.

Banks will typically not automatically give you a better rate if you stay with them. Many banks in Germany also charge very high markups. It, therefore, often pays to shop around for a better mortgage. 

Is it better to refinance my mortgage or lock in a forward mortgage?  

You can also choose a forward mortgage to lock in the current rates for the future. You can lock in future rates up to about 5 years ahead. Forward mortgages are relatively expensive and it makes sense only if you really expect interest rates to go up, or cannot handle the risk of a higher interest rate on your mortgage.

Most people only use a forward mortgage between 6 months and 2 years ahead of the date their fied interest rate runs out. Over such a short period a forward mortgage can make sense as the cost is not that high compared to the penalty for early repayment.

In any case, you are well advised to consult ahead of time what options works better or if you let the mortgage run to the end of the fixed interest period and then look for the best rate. You should also consider if you want to cash out part of the equity in your property and use the proceeds for gainful investments like a second home, renovations or other purposes.

Book a free consultation with one of our experts.

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 calculating your potential savings with one of our mortgage experts, he/she will discuss your best refinancing option with you and 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.) that 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 the 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 two weeks before the new mortgage lender has processed and approved your mortgage application. 

However, in some cases, it can actually take less than two 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 on 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 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 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 whether refinancing makes sense or not.

Does a 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 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. Furthermore, 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 in 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 be 2 to 3 weeks before your forward mortgage is finalized and ready to sign. In most cases, it makes sense to switch to a different bank, as this gives you the liberty to choose the most attractive forward mortgage deal out in the market.

Book a free consultation with one of our experts.

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 six-month notification requirement to make use of the penalty-free refinancing. So, the penalty-free new mortgage takes effect a minimum of 10 ½ years after you obtain 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 pick a 10-year fixed interest rate period and take the earliest opportunity for a forward mortgage, your new mortgage fixed interest period will run from year 10,5 until year 20,5. In year 20,5, you can again refinance penalty-free.  

How high is the rate when closing a forward mortgage?

In the forward rates, there is a credit risk premium, and any profit margins of the bank are 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 fine-tuning the savings estimates with the mortgage advisor. There are also small fees embedded, but we present all-in costs. 

What are the downsides to closing a forward mortgage?

Unfortunately, nothing is risk-free. 

1. Interest rates could decline further or don't rise as the market expects. Then you would have been better off with waiting. 

2. If you sell the house before the end of the new 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 who 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 you decide to terminate your mortgage prematurely. 

Is now a good time to refinance?

Many people think that because the ECB is expected to lower interest rates that therefore mortgage rates go down, and so they dont need to worry about refinancing. Unfortunately this is a misunderstanding. Mortgages are priced of the 10-Year German government bond rate. And the bond market already reflects the likely ECB moves.

This means you still need to take a hard look at whether you can handle and want to handle the risk when the fixed interest period of your mortgage runs out.

Our Advice:

• Start planning early: Check in at least 1–2 years in advance to see whether a forward mortgage or early refinancing makes sense for you.

• Consider a cash-out option: The returns on alternative investments—such as purchasing a second property or building a long-term ETF portfolio—can often exceed the cost of your mortgage interest.

While many people perceive tapping into home equity as a risky move, it can actually be safer in the long run—if the proceeds are reinvested wisely. Using that capital to invest can help build long-term financial security.

It’s also important to recognize the power of compounding. Many underestimate the impact of seemingly small differences in return:

• A 3% return over 20 years doubles your money.

• A 7% return quadruples it.

The difference is far from modest.

Too often, people focus on the short-term “safety” of repaying their mortgage quickly. But in reality, keeping your mortgage slightly elevated and investing the freed-up capital can lead to significantly more financial security in later life.

Book a free consultation with one of our experts.