How to refinance your mortgage in Germany

Are you looking to refinance your mortgage but unsure where to start? Nick Mulder from mortgage broker Hypofriend explains how the system works in Germany.

Refinancing your mortgage in Germany can be a powerful way to lower monthly payments, secure a better interest rate, or even access your home’s equity. However, the refinancing process here differs significantly from what you might be used to.

In Germany, refinancing penalties (Vorfälligkeitsentschädigung) apply if you refinance within the first 10 years of your mortgage, making refinancing before reaching this mark less attractive. That said, it's wise to check if current rates offer savings around the 10-year point, especially when you are near the end of your fixed interest term.

Germany also offers the unique option of a so-called "forward mortgage", allowing you to lock in today’s interest rates several years in advance. This can be especially helpful if you anticipate rate increases, as it gives you control over your mortgage future.

What benefits can refinancing in Germany bring?

Refinancing your mortgage in Germany offers multiple benefits, especially if you’re looking to reduce your monthly payments, secure a lower interest rate, or access your home equity.

By refinancing at a better rate, you can save on monthly expenses, freeing up funds for other financial goals. By switching to a reduced repayment rate, you can preserve cash that could be better invested elsewhere. Additionally, refinancing may allow you to cash out and use the proceeds, for example, to buy an investment property.

By consulting an online mortgage calculator, you can easily compare rates and review repayment schedules across different market scenarios. These tools can provide valuable insights, but consulting an advisor is essential for a complete picture, especially if you’re considering a forward mortgage or have received a prolongation offer from your current lender.

Advisors have access to up-to-date rates and can guide you on whether to refinance now or if extending your current mortgage is the better choice. By combining personalised advice with insights from a calculator, you’ll be in the best position to make a refinancing decision that aligns with your goals.

Refinancing options in Germany

Refinancing a mortgage in Germany offers flexibility, and there are three main options you should consider:

1. Forward mortgage: This unique option allows you to lock in today’s interest rates for up to 66 months before your fixed term ends. It’s ideal if you’re nearing the end of your term and expect rates to rise, as it ensures stability in future payments.
2. Refinancing: Once you’ve held your mortgage for at least 10 years, or your when fixed term ends, you can refinance with a new lender without penalties. Especially when your fixed interest rate term is longer than 10 years, this option allows you to check market rates and switch to a more favourable rate or terms.
3. Prolongation: Staying with your current lender at the end of your fixed rate term and extending your mortgage can be convenient. However, as you can switch, comparing offers from other providers is essential to ensure you’re getting the best possible deal.

The legal and cost implications of refinancing

Understanding the legal and cost implications of refinancing in Germany is essential to making a financially sound decision. German law (§489 BGB) grants homeowners the right to refinance without penalties after holding a mortgage for 10 years. This “10-year rule” allows you to switch lenders or negotiate better terms without facing early repayment fees, making it an optimal time to explore refinancing options.

If you choose to refinance before this 10-year mark, you may encounter early repayment penalties, known as Vorfälligkeitsentschädigung. These fees are calculated based on the lender’s interest loss. The lender typically counts on earning the current interest rate. So if your rate is 4% and the current rate would be 3%, count on such penalties. This means that it rarely pays to refinance early.

How to make the most out of the refinancing process

Maximising the benefits of refinancing requires a clear understanding of your financial goals and options. Whether you aim to reduce monthly payments, access equity for investments, or speed up your mortgage repayment, holistic advice is essential.

A forward mortgage

If you’re concerned about potential interest rate hikes, a forward mortgage may offer the stability you need by securing current rates for future refinancing. This can be done one to two years before the end of the fixed-term period or a 10-year mortgage term, whichever is less. Doing it earlier is often prohibitively expensive.

A Bausparvertrag

If your mortgage fixed interest period ends much further in the future, consider a Bausparvertrag (a German home savings plan), as it provides a predictable rate for part of your future borrowing. Typically, though, setting aside savings and investing in ETFs is a better option for long-term financial safety, as yields are better, and you can build up a good pension nest egg that can also be used in emergencies or used to pay off the mortgage, in case interest rates are really high.

Get personalised advice

Good advisors and brokers allow you to explore these options without defaulting to one-size-fits-all solutions. For example, instead of automatically recommending additional repayments (Sondertilgung), they will assess your financial outlook, offer alternatives tailored to your needs and help you choose the suitable fixed-interest period for your goals.

Meeting with an advisor is invaluable for more complex options, like forward mortgages or a Bausparvertrag. Market conditions can significantly affect forward mortgage pricing, so a personalised approach ensures that your refinancing strategy aligns with both your current situation and future outlook.

Hypofriend provides tailored insights to help you reach your financial goals, whether that's lowering payments, securing better rates, or exploring investment options. They support expats with a straightforward process, making refinancing decisions easier. Explore your options with Hypofriend’s free mortgage calculator or call and book an appointment.