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Refinancing old loans: Exiting expensive loan agreements

For property owners, there can be numerous reasons to refinance an old loan. Many mortgage borrowers want to be debt-free before retirement or sell their property. Historically low interest rates also tempt people to replace a more expensive real estate loan and refinance with the cheaper option.

At the turn of the millennium, mortgage interest rates still averaged between six and seven percent. Today, they still linger at an average of four percent. Anyone who replaces an old loan with a new one can therefore significantly reduce their interest burden. But what can borrowers do who are financing their real estate with a current fixed interest rate and want to get out?

What banks are allowed to do

If home finance clients want to continue financing their properties with a cheaper follow-up loan, the bank must first play along. After all, anyone who does not negotiate cleverly with their old lender will remain stuck with their old loan or lose a lot of money when exiting. The credit institutions charge a very reasonable compensation for exiting a mortgage loan before the end of the fixed-interest period.

The payment rightly feared by many real estate financiers is called Prepayment penalty. Credit institutions have a legal right to this. After all, lenders and borrowers once voluntarily agreed to conclude the loan agreement. If the borrower exits an ongoing contract prematurely, the bank as the lender could lose out on the interest for the remaining term. The early repayment penalty is therefore a type of compensation for damages.

Even in the event that the borrower refinances and thus exits the loan prematurely, credit institutions do not end up badly off as real estate lenders. The Institute for Financial Services (iff), on behalf of the Federation of German Consumer Organisations (vzbv), has calculated a burden of 10,000 EUR for borrowers who want to exit a 200,000 EUR loan after five years, for which a term of ten years was originally agreed. For comparison: After Germany, Austria demands the second-highest prepayment penalty. Here, only half of the amount is due.

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What the legal situation says

Credit institutions may completely refuse to Exit from mortgage loan not even with a fixed interest rate in the Federal Republic. Courts have ruled on this in a large number of judgments. The Federal Court of Justice (BGH) as the highest legal instance in two cases granted borrowers a legitimate interest granted the right to redeem old loans early. This is possible without the consent of the lending bank if real estate is to be sold. In the case of ongoing financing, this is not possible without redeeming the loan and the associated mortgage encumbrance.

A legitimate interest also exists if plots of land or real estate are required as collateral for an additional loan that can only come from another institution. The bank is also entitled to compensation if the borrower has a legitimate interest. Exiting completely without payment only works if the interest rate was agreed for a period of more than ten years. After a period of ten years has elapsed and subject to a six-month notice period, the borrower may exit without additional costs.

By the way: While credit institutions are allowed to charge compensation for the early repayment of a mortgage loan, toward the customer they are nevertheless committed to transparency. The latter must be able to understand how the claim for the default loss was calculated. The Federal Court of Justice has also stipulated this in several rulings.

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What interests banks have

If the customer cannot demonstrate a legitimate interest, they may have to fight for it. Two arguments are of interest to banks and savings banks for allowing real estate owners an early exit from a fixed-rate loan. If, for example, they are good customers, credit institutions are interested in maintaining an undisturbed business relationship.

To prevent the customer from defecting to the competition at the latest when the loan agreement expires, institutions even voluntary offer for debt restructuring. Furthermore, lenders no longer have to fear a default on the loan upon the immediate repayment of a mortgage. This can also encourage banks' willingness to let the customer go.

When debt restructuring is worthwhile

A debt restructuring before the end of the term must, of course, also be worthwhile for real estate owners. One of the most important criteria in this regard is which Interest rate trend is expected by the mortgage lender for the coming years. If the interest rates for all subsequent follow-up financing are low, the savings may compensate for the very high prepayment penalty costs. A reliable calculation for this can be made by a real estate financing specialist.

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