Extension

Refinancing - Refinancing refers to the extension of an existing mortgage with the same bank after the fixed-rate period expires, under newly agreed terms.

How does a loan extension work?

When the fixed-rate period of a mortgage expires - typically after 5, 10, 15, or 20 years - the borrower faces the question of refinancing. Renewal is the simplest and most convenient option: The borrower stays with their current bank and simply agrees on a new interest rate for the next fixed-rate period. The mortgage, account number, and contractual relationship remain unchanged.

Typically, the bank submits a written renewal offer to the borrower approximately three to six months before the expiration of the fixed-rate period. This offer includes the new borrowing rate, the proposed fixed-rate period, and, if applicable, adjusted repayment terms. The borrower can accept this offer, renegotiate it, or reject it.

The main advantage of renewal lies in the minimal effort involved: There are no notary or land registry fees, as the existing mortgage continues. In most cases, a new credit check is also not required. The downside is that the offered interest rate is not necessarily the best available on the market. When extending loans, banks often count on the convenience of the customer and do not automatically offer their lowest interest rate.

The two main alternatives to renewal are refinancing-that is, switching to another bank with more favorable terms-and the forward loan, which allows you to lock in the follow-up interest rate up to 60 months before the fixed-rate period expires.

Room for Negotiation and Interest Rate Comparison

Many borrowers underestimate their room for negotiation when renewing a loan. The existing bank has a financial interest in retaining the customer, as a switch means the loss of an ongoing loan commitment for them. We therefore recommend obtaining at least two to three comparative offers from other banks before accepting a renewal offer.

Experience shows that simply presenting a more favorable offer from a competitor often leads your primary bank to improve its interest rate. An interest rate difference of just 0.2 percentage points can result in savings of several thousand euros over ten years for a remaining debt of 200,000 euros. It is important to always compare the effective interest rate-not the nominal interest rate.

In addition to the interest rate, other terms should also be negotiated during the renewal: special repayment rights (at least 5% of the loan amount annually, free of charge, should be standard), the option to adjust the repayment schedule, and any commitment fees in the event of delayed disbursement. These ancillary terms also have a significant financial impact over the course of the fixed-rate period and are often overlooked by many borrowers during negotiations.

Practical Tip for Nuremberg and Franconia

In the Nuremberg metropolitan region, in addition to major national banks, regional institutions such as Sparkasse Nürnberg, Sparda-Bank, and the Volksbanken Raiffeisenbanken in Franconia are strongly represented in the real estate financing sector. We recommend that our clients obtain quotes from both national lenders and regional institutions when refinancing is imminent. Franconian cooperative banks, in particular, often offer attractive renewal terms to retain existing customers with good credit ratings. Those who address the issue early-ideally twelve months before the fixed-rate period expires-have enough time for a thorough comparison and do not have to accept the first offer that comes along.

Renewal vs. Debt Restructuring: Which Is Better?

The decision between renewal and refinancing depends on several factors. Renewal offers the advantage of minimal effort: no need to switch banks, no new credit checks, and no costs for transferring the mortgage lien. This is particularly relevant for borrowers whose creditworthiness has deteriorated since the original loan was taken out-for example, due to reaching retirement age, becoming self-employed, or a reduction in income.

Debt restructuring is worthwhile if another bank offers a significantly lower effective interest rate. As a rule of thumb: If the difference is more than 0.3 percentage points, the interest savings generally far outweigh the restructuring costs for a remaining debt of 150,000 euros or more. Important: The existing mortgage lien, as a “second-lien mortgage,” can often be transferred to the new bank-this significantly reduces the costs of switching.

Another option is the forward loan: If your fixed-rate period doesn’t expire for another two to five years, you can lock in the current interest rate for a premium of typically 0.01 to 0.03 percentage points per month in advance. In periods of rising interest rates, this is a strategically wise hedge.

Adjusting Repayments During Renewal

An often-overlooked advantage of the renewal phase is the ability to adjust the repayment rate. Borrowers who selected an initial repayment rate of 1% when taking out the original loan can increase it to 2% or 3% during renewal-provided the household budget allows it. Especially during periods of low interest rates with a high remaining debt balance, increased principal payments can significantly reduce the total interest burden and bring forward the date of full debt repayment. Conversely, during financially strained periods, borrowers can temporarily lower the principal payment rate to secure liquidity-provided the bank agrees.

Frequently Asked Questions

Do I have to accept my bank’s renewal offer?

No. After the fixed-rate period expires, the borrower is not obligated to accept the offer from their current bank. According to Section 489 of the German Civil Code (BGB), after a ten-year fixed-rate period, there is a statutory right of termination with a six-month notice period. The loan can then be refinanced with another bank without an early repayment penalty. Even with shorter fixed-rate periods, switching banks at the end of the term is easily possible.

What are the costs associated with a loan extension?

Renewal with the same bank is generally free of charge. There are no notary or land registry fees, as the existing mortgage continues. Costs for the transfer of the mortgage only arise when refinancing with another bank-usually between 200 and 500 euros, including notary and land registry fees. In addition, some banks charge processing fees for the new loan agreement, though these rarely exceed 250 euros.

When should I start looking into refinancing?

We recommend taking action no later than twelve months before the fixed-rate period expires. This allows enough time to obtain comparative offers and, if necessary, renegotiate with your primary bank. If you are in a low-interest-rate environment and expect rates to rise, you can also lock in an interest rate much earlier-up to five years in advance-using a forward loan.

What documents do I need for the renewal?

For a simple renewal with your current bank, signing the renewal offer sent to you is usually sufficient. Some banks require updated proof of income, especially if your personal circumstances have changed. When refinancing with a new bank, the requirements are more extensive: proof of income, a land registry extract, current proof of insurance, and property documents are standard.

Back to the Real Estate Glossary.