Refinancing

Refinancing - In the real estate industry, refinancing refers to the replacement or restructuring of an existing real estate loan with a new loan - typically at the end of the fixed-rate period or to take advantage of more favorable terms. For banks, refinancing means raising capital in the money and capital markets (e.g., through the issuance of mortgage bonds) in order to be able to grant real estate loans.

Refinancing from the Borrower’s Perspective

Refinancing becomes relevant for property owners when the fixed-rate period of their loan expires (loan renewal or debt restructuring), when an existing loan is subject to unfavorable terms and switching banks offers advantages, or when an increase in the loan amount is desired to finance renovation measures. In the case of an extension, the borrower remains with their bank and agrees to new terms. In the case of debt restructuring, they switch to another bank that offers more favorable interest rates. Debt restructuring is possible without an early repayment penalty if the fixed-rate period has expired or the loan has been outstanding for more than 10 years (special right of termination under Section 489(1)(2) of the German Civil Code (BGB)).

The decision between loan extension and debt restructuring should not be based solely on the interest rate. The repayment options offered, special repayment rights, options to change the repayment rate, and the bank’s service also play a role. Those who have been with a bank for years and hold other banking products there may receive better terms than a new customer. Nevertheless, a direct comparison of terms via independent comparison portals or financing brokers is the best protection against excessive loan extension offers.

Refinancing from the Bank’s Perspective

Banks refinance the granting of real estate loans through various channels: covered bonds (covered debt securities secured by the loan portfolio), savings deposits (deposits from bank customers), interbank market (short-term loans between banks), and ECB refinancing operations. The bank’s refinancing costs significantly determine the interest rate borrowers receive. If refinancing costs rise (e.g., due to ECB key interest rate hikes), mortgage financing becomes more expensive. If they fall, real estate loans also become cheaper-with a delay of days to weeks.

The Pfandbrief is the most important refinancing instrument for German mortgage banks. Covered Pfandbriefe are considered particularly secure because they are backed by a cover pool of senior real estate loans. They are therefore issued on the capital market at lower interest rates than unsecured bonds, which translates into lower loan interest rates for borrowers. Interest rate trends in the Pfandbrief market are therefore a good leading indicator of future trends in mortgage interest rates.

Strategies for Optimal Refinancing

When planning refinancing, property owners have several strategies at their disposal. A conservative strategy relies on a long fixed-rate period (15-20 years) to gain planning security and minimize interest rate risk. A flexible strategy uses shorter fixed-rate periods (5-10 years) when interest rates are currently low and consciously accepts the risk of a rate increase. The forward loan combines both approaches: It locks in current interest rates for a follow-up financing that does not begin until the future, thus offering planning security without immediately committing to a new fixed-rate period.

The choice of fixed-rate period depends on one’s personal risk tolerance, the amount of the remaining debt, and plans for the property. Those who plan to sell a property in the foreseeable future should not choose a fixed-rate period that is too long-early termination of the loan triggers a prepayment penalty. On the other hand, those who plan to live in the property long-term or rent it out benefit from the planning security of a long fixed-rate period.

Practical Tip for Property Owners in Nuremberg

We recommend that property owners in the Nuremberg metropolitan area begin arranging follow-up financing 12-18 months before the fixed-rate period expires. Compare your bank’s renewal offer with at least 3 competing offers. With a forward loan, you can lock in current terms up to 60 months in advance-for an interest premium of approximately 0.01-0.03% per month of lead time. In Nuremberg, independent mortgage brokers (e.g., Interhyp, Dr. Klein) are a good place to start for comparing terms.

Don’t be tempted by the convenience of a loan extension-the interest rate difference between your primary bank’s offer and the most favorable provider is often 0.3-0.5 percentage points, which amounts to several thousand euros over 10 years for a remaining debt of 200,000 euros. In the Nuremberg metropolitan area, where many properties were financed at high-cost terms between 2015 and 2020, numerous refinancing deals are due in the coming years. We’d be happy to advise you on the preparation and connect you with trusted financing partners.

Frequently Asked Questions

What does it cost to refinance with another bank?

The following costs are incurred when refinancing: mortgage assignment (cheaper than cancellation and re-registration, approx. 200-500 euros in notary and land registry fees), possibly an appraisal fee from the new bank (0-500 euros), and possibly a processing fee. An early repayment penalty applies only if the fixed-rate period has not yet expired and there is no special right of termination. The total cost of refinancing is around 500-1,500 euros and is almost always worthwhile if the interest rate difference is at least 0.2 percentage points.

What is a forward loan?

A forward loan locks in today’s interest rates for a follow-up loan that does not begin until the future (e.g., in 24 months). An interest premium is charged for the lead time (approx. 0.01-0.03% per month). Advantage: Protection against rising interest rates. Disadvantage: If interest rates fall, you are locked into the higher forward rate. Forward loans are particularly worthwhile during periods of rising interest rates or when there is a large remaining debt, where even small changes in interest rates can have a significant impact.

Can I increase my loan amount at the same time as refinancing?

Yes, a loan top-up is possible as part of the refinancing-provided the property offers sufficient equity and your creditworthiness allows for the higher debt burden. Typical reasons for a top-up include renovation work, energy-efficiency upgrades, or paying off expensive consumer loans. The top-up amount is usually financed at current market rates, while the existing loan is renegotiated.

What should I do when I receive the renewal offer from my bank?

Do not sign the offer immediately. Use this time to obtain comparative offers-banks are required to send the renewal offer at least three months before the fixed-rate period expires, so you have sufficient time to compare options. Submit the offer to an independent mortgage broker and ask for comparative terms. Only when you are certain that the offer is in line with the market or even better than the market should you sign.

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