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When the fixed-interest period for a real estate loan expires, many borrowers are faced with the decision of how to proceed with their construction financing. Is an extension the right path, or is a refinancing more appropriate? We will explain the advantages and disadvantages of both models.
Refinancing means that you take out follow-up financing with a new lender. The new lender replaces the mortgage loan at the end of the fixed-interest period and receives the land charges in return as security. From then on, the borrower pays his instalments at the new conditions. Typically, refinancing is only useful at the end of the fixed-interest period, since otherwise an early repayment penalty will be charged.
Advantages and disadvantages
The most important advantage of any refinancing is a more favourable follow-up financing. Although you usually have to pay an interest premium, the interest savings are significantly greater, especially with longer maturities. Even at a tenth of a percent, you can save a great deal here. A disadvantage compared to an extension is that the effort is somewhat greater. First of all, a comparison must be made of all providers. A new credit assessment and a new real estate appraisal are then typically required. Finally, notary and land registry fees are also due.
For whom is refinancing suitable?
Refinancing is particularly suitable if the residual debt is still relatively high at the end of the fixed-interest period. Furthermore, refinancing models are recommended above all when interest rates are expected to rise in the long term.
In the event of an extension, the contract with the previous lender is extended. Typically, it makes the borrower an offer for a new interest rate agreement prior to the end of the fixed-interest period. If the borrower accepts it, the loan continues with the new conditions.
Advantages and disadvantages
The advantage of an extension is that it is very uncomplicated. You get a new offer sent to you, you sign it and then everything goes on as usual. In addition, no further submission of real estate and creditworthiness documents is required. On the other hand, the offers of the previous lender are often not the most favourable. As a rule, the scope for negotiation is very limited.
For whom is the extension suitable?
An extension is particularly recommended if the residual debt at the end of the fixed-interest period is still relatively low. In this case, higher mortgage interest rates are no longer so important. Even if the bank’s interest rates are at the usual level of the capital markets, an extension is recommended.
Even if the expiration of your fixed-interest period is still a few years in the future, you can act now with respect to follow-up financing. We recommend this above all if rising interest rates are to be expected for your home loan in the short to medium term.
A good option here is the forward loan. This allows you to secure follow-up financing up to five years in advance at the currently favourable interest rates. Note, however, that such a loan is bound to its conditions for the entire repayment period. If interest rates continue to fall unexpectedly, you will pay an interest rate that is above the current level of the capital markets.
Although refinancing always comes with a certain amount of effort, it is still worthwhile in many cases.
It is frequently the case that significantly better conditions can be achieved than with the previous bank. The prerequisite for savings is a conscientious comparison of the various banks and, above all, a consideration of factors such as additional fees. An extension is particularly suitable if the remaining debt can be repaid quickly after the fixed-interest period has expired, or if the bank’s conditions are at the usual level of the capital markets.
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