Follow-up financing for real estate: everything you need to know about refinancing your mortgage
How to refinance your mortgage and save money
Follow-up financing: when it's time to extend your property financing
When you're just starting out buying real estate, follow-up financing isn't even on your radar. And why should it be? In the beginning, your number one priority is to secure appropriate financing for the purchase itself.
However, most mortgages aren't finished being paid off by the time the interest rate lock-in period ends. It isn't necessarily a bad thing, nor is it unusual for the loan term to be longer than the lock-in period. If you can't or don't want to pay off the remaining balance when the lock-in period ends, then follow-up financing is your only option.
If you're more the "take-what-you-can-get" type of person, then you can always wait for your current lender to make you an offer — and you can be sure they will at least three months before your lock-in period ends. However, if you want to take matters into your own hands and arrange your follow-up financing yourself, then it's best not to wait too long to get started. You have two options: Your first option is to gather offers from different banks, compare them, and potentially switch to a new lender (this is called "Umschuldung" in Germany). Your second option is to take out a so-called "forward loan," which enables you to get a lower fixed interest rate on your follow-up financing even before your current lock-in period ends. That can be a great route to take if interest rates are really low and it looks like rates will go up in the next one to five years. Sure, no one can tell you if, when, or how much interest rates will climb, and the further away the end of your current lock-in period is, the more conservative experts will be with their forecasts. But the fact of the matter is: a well-timed forward loan can mean having your follow-up financing squared away early on. In the best-case scenario, you'll be rubbing your hands together over having the same monthly payment at a lower interest rate (which also means paying your loan off faster).
Want to learn how all of this works in practice? . Or keep reading for plenty of facts, figures, tips, and lessons we learned from our personal experience. If you'd rather listen to the follow-up financing info, just start our podcast episode (German audio only).
Follow-up financing for real estate: what is it?
When you purchased your investment property, you had to borrow money from the bank. Now you're making monthly payments on that loan, plus interest. At some point, the lock-in period for your fixed interest rate is going to end, or you're going to be able to make use of your right to extraordinary termination (Sonderkündigungsrecht).
Good to know
According to Section 489 of the German Civil Code, you have the right to get out of your current loan ten years after the total amount of the loan was disbursed to you. Sounds pretty good, right? In any case, it's a good idea to make use of this right if you have a long lock-in period and interest rates are currently lower than what you've been paying. The crucial thing to keep in mind here is that you have six months to terminate your current loan when you reach the ten-year mark.
Just like with your original property financing, there are several ways you can go about getting follow-up financing as well. We know all of this can be highly time-consuming and nerve-wracking, and we totally understand if you'd rather save yourself the hassle. After all, investing in real estate should be easy, not painful. So, if you want us to take care of the annoying parts for you, just let us know.
Want to know what your options are first? Keep reading to learn about the differences between refinancing with your current lender and switching to a new lender, what a "forward loan" is, and what kinds of fees you can expect. Let's get started.
Refinancing through your current lender (Prolongation)
Prolongation is the most convenient way to secure follow-up financing since it's basically an extension on your existing loan from the same lender under the same contractual conditions. However, there are two differences: the bank sets a new fixed interest rate, and you decide on a new lock-in period. Your financing switches over seamlessly to the new loan on the agreed date, and that's all there is to it. But there's one catch: the bank often gives you a higher interest rate than you might find elsewhere, and there's not much you can do about it. Ultimately you end up spending more, which is a pain.
Refinancing through a different lender (Umschuldung)
When it comes the time to start looking for follow-up financing, this is our recommendation: always compare different offers and never wait until the last second to do it. We'll also be more than happy to shop around for you — before you know it, you'll have multiple follow-up financing offers sitting in your inbox. All you have to do is compare them and tell us which one you like the best. We'll deal with the lender to get everything else taken care of.
There are a few documents you'll need to have:
Proof of income for the last three months
Floor plan, cadastral map, and building documents for the property
A land register extract that is not older than 12 months
If you find a much better offer from a different bank (one offering you a lower interest rate), you can arrange to have your debt refinanced through that bank when your current fixed interest rate runs out. This is called "Umschuldung" in Germany and can be done if your current lock-in period is due to end in 12 months or less.
In this sense, Umschuldung is nothing more than switching lenders to pay back the remaining balance on your loan. In other words, you borrow the amount of your remaining balance from a new bank and pay that amount to the bank that initially financed your real estate purchase. When your current loan period runs out and the new one begins, you simply transfer your monthly payments to the new bank instead of the old one.
Let's say your lock-in period is ending, and you've got a remaining balance of €80,000.
Your current lender offers to extend your financing at an interest rate of 2%. With this offer, you'd pay €80,000 x 2% = €1,600 in interest the first year.
Then another lender offers you follow-up financing at an interest rate of 1.6%, which would give you a payment of €80,000 x 1.6% = €1,280 in interest the first year.
By switching to a different lender, you'd save €320 on interest payments in the first year.
In most cases, refinancing your remaining debt through a different lender ends up paying off for you because the new lender has to reappraise your purchased property. If the property has increased in value, then your remaining debt will make up a smaller percentage of the appraised value, and the bank will only require you to finance, let's say, 60% of the property value instead of 80%. That, in turn, unlocks better repayment conditions, such as having a lower monthly payment or keeping the monthly payment the same and paying off your loan quicker.
However, there are a couple of downsides to refinancing through a different lender: a small one and a big one.
First: You have to get and compare financing offers from different banks. In reality, this is a non-issue because Urbyo does all the offer-gathering for you, so there's no need to run from bank to bank. So, no big deal.
Second: The land register needs to be modified when you switch lenders: The old bank needs to come out of the register, and the new one needs to go in. Either the registered mortgage is transferred, or it is discharged from the land register with a new mortgage registered in its place. If the registered mortgage is to be transferred, the banks will deal with this themselves. And as long as you aren't borrowing more money than the registered mortgage can cover, this is the usual route that will be taken. If, however, the mortgage needs to be discharged, the notary will have to register a new one. That means more work for the notary and higher fees for you. For a transfer of the mortgage, you can expect to pay several hundred euros. Having the registered mortgage discharged and a new one registered in its place, on the other hand, will easily cost you somewhere in the thousands of euros. Which of these two options gets selected is up to the bank that approved your original loan. So, in sum, refinancing through a different lender comes with a few additional costs.
If you're wondering whether refinancing is worth it because the fees apparently could outweigh the money saved from a lower fixed-interest rate, follow this rule of thumb: If your new interest rate is 0.2% lower than the old one, refinancing through a different lender (Umschuldung) is worth it.
To avoid using your savings to pay for the land register changes, simply increase how much you borrow by precisely the amount you need to cover them.
Even if your lock-in period is due to end in more than 12 months, there's yet another way you can secure follow-up financing. You can do this up to 66 months (5.5 years) before your fixed-interest rate is set to run out. Whether you like to play it safe or you're a veritable trend expert when it comes to interest rates, there's room for everybody. Instead of refinancing (Umschuldung), this is referred to as a "forward loan."
A good time to start arranging for a forward loan is 36 months before your original loan period ends. If you got your loan through a mortgage broker, then you won't even have to set a reminder for yourself: the mortgage broker will contact you when it's time. Very convenient.
A forward loan enables you to set the fixed interest rate on your follow-up financing now before your current lock-in period has run out.
Let's say the fixed interest rate on your current mortgage is due to end in three years, and interest rates right now are very low, or at least much lower than what you're currently paying. With a forward loan, you can arrange with the bank to have the lower rate applied to your follow-up financing, which will kick in in three years.
The big advantage with this is that you already have your follow-up financing squared away, and you don't have to find and compare any additional offers by the time your lock-in period ends. Nice! Plus, you know exactly what your loan situation will look like in three years, which is great for future planning. In this case, your interest rate will be much lower than your current one, giving you the option of lowering your monthly payment or keeping it the same and paying the loan off quicker. Double nice!
And you can rest assured that if you decide to go with a forward loan, we'll be here to help you along the way. All you have to do is .
But there is one catch here as well: for everything nice, there's a price. Just like with refinancing through a different lender (Umschuldung) (-> JUMPMARK auf Abschnitt oben), forward loans might come with fees for land register changes — if you're getting one through a new lender. In addition to this, the bank will also charge you an interest rate premium of about 0.015% for each month until your current fixed interest rate runs out.
Let's say your fixed interest rate is going to run out in 48 months. You can expect your interest rate premium to be 0.015% x 48 months = 0.72%. In other words, your monthly payment will be 0.72% higher if interest rates are still the same in 48 months. But if they go up by more than 0.72% by the end of your lock-in period, you got an excellent deal.
The interest rate premium is the bank's way of minimizing its risk of being unprofitable. If it turns out that interest rates are significantly higher than they are now when your follow-up financing kicks in, it will end up "costing" the bank more to borrow money itself. But securing follow-up financing three years before you need it gives the bank enough time to plan with relative confidence. That's why many lenders offer forward loans starting 36 months before the end of your current lock-in period and often at no extra charge (no premium). Not too shabby, huh?
At the end of the day, forward loans are like poker: You place your bet on a lower interest rate in the hope that it'll save you money in the future, but you also take the risk that the actual interest rate is even lower on the day your follow-up financing goes into effect. At that point, you can't renegotiate the loan terms or sign a separate loan agreement. That's the luck of the draw.
Another thing: you don't have to pay commitment fees on a forward loan as you would on a loan for a property that still hasn't been built. In the latter case, the bank sets the total purchase price aside for you. If the money is disbursed to you in parts as construction proceeds, then at some point, you have to start paying a fee on the portion of the loan that still hasn't been disbursed.
A forward loan is always an attractive option when interest rates are low. Sure, it isn't easy to say whether interest rates will be higher or lower when the forward loan goes into effect. Still, the likelihood of interest rates climbing is much higher if they've already bottomed out — at some point, there's nowhere to go but up. The important thing for you to do at this point is to ask yourself what the lowest interest rate is that you could get right now and what the highest interest rate is that you would be willing to accept.
Looking for some additional assistance? Just swing by our Community to ask the experts everything you want to know about forward loans.
Whew, that was a lot of information. To make it easier to compare options, we've listed all the pros and cons of each form of follow-up financing in the table below:
|Refinancing through your current lender (Prolongation)||Refinancing through a different lender (Umschuldung)||Forward loans|
|No extra effort required since the offer comes automatically from the bank||No alternative offers||Freedom to choose the best offer||Potentially more time-consuming because you have to collect alternative offers||Possible to get a low interest rate very early on||Interest rate premium (the longer the lead time, the higher the cost)|
|No financing documents needed||Often very high interest rates||Different lenders offer lower interest rates in most cases||Land register fees||Possible to get lower monthly payments or faster amortization||No guarantee that interest rates will not be even lower when your follow-up financing goes into effect|
|No land register fees||Little room to negotiate for better conditions||Lower monthly payments or faster amortization||Security for future planning|
Things that can go wrong when obtaining follow-up financing
Just like your original loan, your follow-up financing normally takes the form of an annuity mortgage. As you might recall, to get approved for your first loan, you had to submit a bunch of documents for review, and your financial situation went through a detailed check. The process of applying for follow-up financing for real estate is similar. Lenders will want to know whether you are still able to make your monthly payments.
If you are refinancing (Umschuldung) or taking out a forward loan through a different lender, they will also want to take a very close look at what's currently in the land register. No bank will approve you for follow-up financing unless it is advantageous for them. Something as small as the word "Reallast" (land charge) can put an end to the whole thing, or at the very least, make it more expensive for you to secure financing.
At this point, we have to get into the legal weeds for a second. A "Reallast" is a type of land charge which conveys the right to recurrent payments to a third party from the plot of land. These recurrent payments can be monetary, in-kind, or in services. The specific definition of a "Reallast" land charge, and its legal significance, are laid out in Sections 1105 – 1112 of the German Civil Code.
Speaking from experience
One of the real-life examples we've seen of this concerns a playground belonging to a property owners association. Together, the property owners were responsible for paying around €2 a month for the upkeep of the playground. After the purchase agreement was signed and notarized, this obligation was entered into the land register as a "Reallast" land charge. The new owner of the property had already received an offer for follow-up financing from a bank. But the land charge was so crucial that, after having reviewed the land register, the bank wanted to withdraw the offer. How much the monthly payment amounted to was of secondary importance to them.
Having the help of a mortgage broker at this point was worth its weight in gold. The issue was dealt with, and the offer was renegotiated without the borrower, and a few days later, there was a new offer on the table. "New" in the sense that the interest rate was higher, making the monthly payment €30 higher than it was in the original offer. Ouch. And all this fuss about a seemingly insignificant word with a €2 price tag attached to it.
When something like this happens, you have to decide for yourself if the more expensive offer is still worth it and whether or not to accept. You can still shop around for follow-up financing offers from other banks, or you can put the issue on the backburner for the time being. It's up to you. If you're looking for someone to bounce ideas off of, head on over to the Urbyo Community.
Another thing that can be aggravating about follow-up financing is that you have an opportunity to get a fixed interest rate that is lower than your original one. However, you might come to find that interest rates are even lower in ten years. The problem is that you have a lock-in period of maybe 15 or even 20 years. It isn't actually all that big of an issue because you can still make use of your right to extraordinary termination (Sonderkündigungsrecht) and refinance with a different lender if needed.
As you can see, there are a few hurdles that you might need to deal with, but there's no getting around follow-up financing (in most cases). And for this reason, both you and the bank have the same goal in mind: finding a solution.