How to refinance your mortgage in Germany

Looking to cut your monthly repayments or pay back your home loan more quickly? Refinancing your mortgage in Germany has some quirks you won’t find elsewhere in Europe. 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.

Learn more about the process, how much it will cost, and how long it will take by reading the following sections:

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

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 our guide 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.