For numerous property owners who financed their properties at favourable conditions ten or 15 years ago, the need for follow-up financing is drawing closer. The structure of this follow-up financing and, in particular, the magnitude of the resulting interest rate jump are determined by several factors: the remaining lead time, the amount of the outstanding debt, the available income, and the current condition of the property. Ralf Oberländer, a construction finance expert, identifies five key mistakes that owners should avoid in this process to secure optimal conditions.
Planning and Lead Time: A Crucial Basis
A common mistake is late planning for follow-up financing. Many owners tend to wait for an offer from their principal bank. This reduces the time available for compiling necessary documents, comparing offers, and renegotiating terms. The options for follow-up financing vary greatly with the remaining time until the end of the fixed-interest period. With more than five years remaining, a building society savings contract (Bausparvertrag) for the anticipated outstanding debt can be an option to secure future interest rates, provided there is sufficient financial leeway for additional savings contributions. Between five years and one year before the fixed-interest period expires, a forward loan is advisable, as it locks in conditions early. It should be noted that banks apply an interest surcharge for each month of lead time until disbursement. Once agreed, this loan must be taken up, even if interest rates should fall in the interim. In the case of a re-mortgage, precise planning of the disbursement date is essential to avoid the calculation of commitment fees by the new bank after the interest-free commitment period expires.
At least six months before the end of the fixed-interest period, it is advisable to compare the extension offer from the existing bank with offers from other providers. Mr Oberländer points out that waiting in this context rarely represents an advantageous strategy. Acting under time pressure, triggered by a late offer from the bank, often results in higher interest rates.
Holistic View: Beyond the Interest Rate
Follow-up financing is not merely a process for settling outstanding debt. It provides an opportunity to consider upcoming modernisation measures and the long-term utilisation strategy for the property – be it owner-occupation, sale, rental, or inheritance. Proactive planning of maintenance or modernisation projects can enable their integration into the financing and avoid the need for a separate loan shortly after the follow-up financing is concluded.
- —When does the fixed-interest period end?
- —What are the outstanding debt, the current interest rate, and the amortisation?
- —What reserves are available, and what monthly instalment is sustainable in the long term?
- —What is the current property value, the energy efficiency status, and the loan-to-value ratio?
A precise understanding of one's financial situation is essential. This includes knowledge of the end date of the fixed-interest period, the amount of the outstanding debt, the previous interest rate and amortisation rate, as well as available reserves and the permanently affordable monthly instalment. Furthermore, the current property value, the energy efficiency status of the property, and the loan-to-value ratio, which describes the relationship between the loan amount and the property value, are significant. Mr Oberländer explains that after several years of amortisation, the loan-to-value ratio is often more favourable than at the beginning of the financing, which improves borrowers' negotiating position. A parallel increase in property value can additionally positively influence this starting position.
Solely focusing on the interest rate when rates are rising is another potential mistake. The monthly instalment is also determined by the outstanding debt, amortisation, and term. Adjusting the amortisation rate can reduce the short-term monthly burden but may prolong the repayment period and increase overall costs. It is crucial that the new rate fits the individual's life situation, considering income, reserves, family stage, and time until retirement. The interest rate merely represents the price tag; the holistic fit of the financing to one's life and the long-term sustainability of the rate are decisive, as Mr Oberländer notes.
Accepting the principal bank's first offer without scrutiny is convenient but rarely the optimal solution. A comparative offer shows whether a re-mortgage is advantageous or if the principal bank still has room for renegotiation. Owners with good creditworthiness, low outstanding debt, and a value-stable property generally benefit from a comparison. When changing banks, in addition to the conditions, additional costs such as those for assignment of the land charge, notary, and land registry must be considered. Early repayment can also incur an early repayment penalty, unless the special right of termination under Section 489 of the German Civil Code (BGB) applies. This allows borrowers to terminate with a six-month notice period after ten years of full disbursement without an early repayment penalty, if construction interest rates have significantly decreased during a longer fixed-interest period.
Follow-up financing has a direct impact on the costs of one's own property over the next ten to 15 years. An early overview enables a stronger negotiating position and the integration of modernisation plans, amortisation strategies, and personal life planning. Mr Oberländer emphasises that the date for follow-up financing has been known since the initial contract was signed, yet many owners are surprised. What is crucial for good financing is not the interest rate on the cut-off date, but the preparatory measures of previous years. Special repayments represent an often underestimated lever here; they reduce the outstanding debt before the fixed-interest period expires and thus improve the negotiating position.
