What does the borrowing rate depend on?

When consumers buy a property, they usually finance part of the purchase price with a property loan, which has a fixed term and fixed interest rates. If the fixed interest rate expires after, say, 10 or 15 years, you will generally have to refinance your loan at current interest rates. You have two options for this: an interest rate adjustment (renewal) with your current lender or a refinancing loan (Ablösekredit) if you either switch to another (savings) bank or insurance company, or you agree this type of refinancing loan with your current lender, for example to consolidate or restructure several loan agreements.

The current level of interest rates for property financing is decisive

The current level interest rate for property financing always has the greatest influence on the terms and conditions of your follow-up financing.

If you want to stay with your current lender, the interest rate adjustment or renewal agreement from your current loan agreement usually applies. As a rule, this contains a reference to the current borrowing rates offered by the lender for loans like this. If you decide to restructure your debt, the new lender will also base its quote on the current borrowing rates.

Low loan-to-value ratio – cheaper interest rates

The loan-to-value ratio is very important for follow-up financing. It represents the ratio of the outstanding residual debt to the mortgage lending value of your property.

The mortgage lending value is not the same as the market value, but a separate value. The mortgage lending value is the value of the property that experience has shown can be expected to be obtained from a sale, irrespective of temporary, for example cyclical, fluctuations in value – on the relevant property market and for the entire mortgage lending period. This excludes speculative factors.

Generally speaking: the lower your residual debt, the lower the loan-to-value ratio, and hence the lower the interest you will have to pay in future. This means that if you succeed in repaying a large part of your property loan as scheduled or through special redemption payments (Sondertilgungen) by the time the fixed interest period or fixed interest-rate agreement expires, you will not only lower your residual debt. You will also increase your chances of obtaining relatively attractive interest rate conditions, depending on your credit rating.

Which is better: interest rate adjustment or debt restructuring?

If you stay with your existing lender, the question of whether a new credit check has to be carried out on you will depend on the terms and conditions of the loan agreement. If the lender does not have to make a new loan decision for the fixed interest agreement (interest rate adjustment), they may refer to older information that is available to them. However, every lender must review the counterparty default risk at least once a year from the date the loan is granted. In other words, they will assess the risk that you will not be able – or want – to repay your loan in full. The lender must also monitor the recoverability of your collateral. If the value of your collateral deteriorates, the lender normally has to revalue the property. This can also negatively impact the terms and conditions of the follow-up financing.

If you restructure your debt, the new provider must fully check your identity, your credit rating (your debt servicing capacity) and the recoverability of the collateral (the property). In most cases, they will themselves have the property appraised to determine the mortgage lending value.

There is no general answer as to whether you will be offered more attractive terms by your existing lender or a new lender. It all depends on the individual case. You can use enquiries about terms and conditions to compare quotes from different lenders. When changing lenders, you should take into account the costs to transfer the security interest, i.e. usually the land charge, when comparing quotes.

What are the consequences of higher interest rates?

If you have to repay the residual debt at a higher interest rate than before, you will have to pay higher instalments or repayment will take longer. Depending on how old you were when you bought your home, this means that you could still be repaying the property loan when you have retired.
This can become problematic for consumers if

• they have taken out high loan amounts and paid off relatively little during the fixed interest period, or
• their financial capacity has already been exhausted with the terms and conditions of the current financing.

In the worst case, the residual debt and interest difference can be so high that they can no longer afford the monthly instalment. In this case, the follow-up financing may even fail.

What can you do?

Deal with the situation in good time

Don't wait until your lender approaches you before you start thinking about the interest rate adjustment agreement. Keep an eye on how interest rates for property financing are developing. You can find data on this on the websites of the Deutsche Bundesbank, lenders and loan brokers, for example.

Check whether you should be making additional repayments

The lower your residual debt at the end of the fixed interest period, the lower the interest rates will be for the interest rate adjustment agreement or refinancing loan. Calculate in good time the amount by which you would need to lower your calculated residual debt to allow you to benefit from a more attractive interest rate. Find ways to afford this amount so that you can use the attractive interest rate to your advantage.

Repayment can be worthwhile, especially if you have already benefited from an attractive fixed borrowing rate. Check your current agreement. Many loan agreements allow you to make limited special redemption payments each year of up to five or ten per cent of the total loan amount. They also often contain provisions allowing you to increase the monthly instalment rates by a certain amount.

If you did not receive the right to make special redemption payments when you signed the contract, you can put aside any amounts available and make a single repayment when your current fixed interest period expires.

Regardless of whether you have a special redemption right or not, the exact date after you have received the loan in full is an important date for longer fixed interest periods. This is because the law gives you a right of cancellation after ten years, meaning you can cancel your loan in full or in part. This allows you to repay all or part of your residual debt without incurring a prepayment penalty, i.e. an extra payment for early repayment. The only thing you need to bear in mind is that you have to give six months’ notice after the end of the ten-year period. You should also look into this option.

Seek advice

Make use of advisory services. Customer advisors at (savings) banks and insurance companies, as well as independent property loan brokers, are required to provide you with personalised advice. They must take your financial situation and personal circumstances into account and offer you various financing options.

It is important that you provide the advisors concerned with all the necessary information. Compare different quotes.

You can also discuss quotes for follow-up financing with independent experts. You will find these at consumer advice centres, among other places.

Carefully calculate forward loans

Many lenders offer consumers an opportunity to agree a new fixed interest rate period long before the current fixed interest period expires. Pay attention to current interest rates for property financing and consider whether you want to take out this sort of forward loan. They are usually offered up to five years in advance.

You should bear this in mind: with a forward loan, an interest premium is usually due for each month until the end of the current fixed interest period or the start of the new loan. Its amount can vary.

Discuss with your advisor whether and when a forward loan like this might be suitable for you.

Check complex financing offers carefully

Immediate financing (Sofortfinanzierung) through a Bausparkasse is a complex financing model that is offered for initial and follow-up financing. It combines a Bauspar contract with a bridging interim loan. This is a loan without ongoing repayments that bridges the savings phase of the Bauspar contract. Once it has been allocated, the bridging loan is replaced by the Bauspar balance and loan.

Before you consider this sort of immediate financing, you should familiarise yourself thoroughly in advance with the contractual provisions. To ensure that this form of financing meets your plans and expectations, you should obtain detailed information about the relevant Bauspar product, how it works, and potential risks during the consultation.

Avoid deceptively simple loan deals

You will find a large number of offers online that promise straightforward loans in case of financial hardship. Be very careful: there are usually criminal intentions behind them.

Check whether the alleged lenders are licensed in Germany or in another country of the European Economic Area. You can find this out using the BaFin database of companies or the corresponding websites of foreign supervisory authorities.

BaFin regularly draws attention to dubious practices and provides information about unscrupulous loan websites, among other things because the operators are not authorised to conduct lending business. Please note, however, that these warnings can never be exhaustive because of the large number of fraudulent offers and constantly changing practices.

Caution with social media

You can find a great deal of advice on property and follow-up financing on social media platforms such as YouTube, TikTok, Reddit and others. The explanations and tips are often easy to understand and helpful. However, there are also some tips that are wrong or at least misleading. Consumers with a poor credit rating, for example, are often advised to take out follow-up financing from their current lender. The reason given for this is that the lender will not recheck your credit rating. This is wrong.

The lender will take into account events during the current initial financing that have negatively impacted your credit rating, for example instalment payments that were not made as agreed, when preparing the renewal quote. Incidentally, the existing lender is not generally obliged to offer any renewal at the “most favourable market conditions”. For this reason alone, you should also look around for comparative quotes at an early stage.

Always check how trustworthy your social media source is first. Even if it is reputable and the tips are generally correct, please consider that general advice on social media is never a substitute for personalised advice. You can only find out the terms and conditions that apply to any follow-on financing if you compare quotes.

Seek advice from debt counsellors

It can happen that your property financing does not go as planned. Possible reasons for this may be that the financing was calculated very tightly from the outset, your personal circumstances have changed or that additional costs will be incurred for unforeseen problems with the property. Anyone who can no longer afford their instalments or fears that they will not be able to get affordable follow-up financing should seek advice without delay.

You can find out what to look out for and which advice centres can help you with excessive debt on the website of the German association of debt counsellors (Bundesarbeitsgemeinschaft Schuldnerberatung e.V).

If necessary: limit the damage

If you are no longer able to finance your home, we encourage you to work with the lender to try to keep the financial damage to a minimum. One option may be to sell the property at a good price and thus avoid the foreclosure.