Refinancing a mortgage: how does it work?
Your mortgage renewal is also a good opportunity to review your situation. Track mortgage rate trends and compare a range of options – it’s usually worth it.
11.11.2024
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1. What does refinancing a mortgage entail?
Refinancing a mortgage means: you change the mortgage model or the provider of an existing mortgage.
2. When can I change an existing mortgage?
You can either terminate the mortgage at the end of the contract term, or refinance it early. Ideally, you should start planning refinancing up to 18 months in advance to give you enough time to find the right follow-up solution.
It can be worth switching to a different lender in order to benefit from low interest rates. But there may be costs involved. There are different options depending on the remaining term of the contract. These apply regardless of whether you have a fixed-rate or variable-rate mortgage.
Your mortgage matures in the next six months
Is your mortgage term coming to an end in the next six months? Check the notice period in your loan agreement. If you observe this period, you can easily refinance your mortgage. The Comparis cancellation reminder reminds you of the cancellation deadline.
Your mortgage matures in the next seven to 12 months
In this case, you can already take out a new mortgage, even with a different lender. You don’t need to terminate your current mortgage early.
However, this will usually incur what is known as a penalty or forward surcharge. This is why the term “forward mortgage” is also used. The surcharge depends on how early the mortgage agreement is concluded and how long the repayment term is. The costs vary considerably depending on the lender.
Your mortgage matures in more than 12 months
If your existing mortgage still has more than one year left on it, your only option is to terminate it early. In general, you will then have to pay an early repayment charge. Despite this, it may still be worth cancelling your mortgage before the end of its term.
Is your mortgage divided into multiple tranches with different terms?
If your mortgage is made up of multiple tranches and you’re planning to refinance, you need to check how much time remains on each tranche. Read more about what to do in this case in the article on mortgages in multiple tranches.
Early repayment charges are compensation that you must pay to your lender if you terminate your mortgage before it matures. In most cases, you will have to specifically ask for the exact amount to be calculated for you.
There are basically two types of compensation model: the amount of the early repayment charge may be calculated on the remaining term of the original contract or on the interest rate difference.
3. Whether to refinance or pay off your mortgage
When a mortgage deal comes to an end, you can either pay it off or refinance it. Various aspects must be taken into account. It often makes sense not to accept the first offer from your bank if you decide to refinance.
By paying off or amortizing a mortgage, you can gradually reduce your debts and lower the interest burden. Although this provides financial stability, it can also lead to a higher tax burden and capital commitment. An alternative is to refinance the mortgage.
4. What to do with your mortgage when you sell your property
You basically have three options when it comes to selling your property:
You can carry the mortgage over to a new property.
You can sell the mortgage along with the old property.
You can repay the mortgage early.
Repaying the mortgage when you sell is usually the most expensive option because of the early repayment charge – if the lender imposes such a charge.
However, if you want to carry your mortgage over to a new property or sell it on to the buyer of your old property, you are dependent on the consent of the lender. It’s well worth looking into solutions at an early stage.
5. How do I go about refinancing my mortgage?
Follow these steps when refinancing your mortgage:
Determine your future financial needs
Ensure your new mortgage strategy reflects your current and future needs. Tip: take into account any renovation costs. Consider increasing the mortgage if necessary. Are you approaching retirement? If so, you should also bear in mind any changes in your income.
Mortgage refinancing and costs: look for exit clauses
If you are terminating your mortgage early, find out about exit clauses. Also take into account any early repayment charges or forward surcharges. One option might be partial refinancing: this would involve splitting the mortgage into multiple tranches with different terms.
Compare mortgage lenders
When taking out a new mortgage, it may be worthwhile changing your main bank at the same time and moving your current and securities accounts, for example. Many providers offer attractive lower interest rates if you do. Compared with taking out a new mortgage, refinancing is relatively straightforward. In many cases, there is no need to get a valuation or involve authorities or notaries.
Pay particular attention when comparing providers: make it clear that you are enquiring about refinancing your mortgage. In addition, compare a range of offers. Mortgage rates can vary considerably. Independent mortgage experts know which lenders offer the best deals.
Good to know: mortgage rates can change every day. For an accurate comparison, it is therefore important that you look at all the quotes on the same day.
It is more difficult to find a new provider if:
You have divided the existing mortgage into several tranches and
the tranches end more than 12 months apart.
Most lenders will not take on individual tranches.
Taking out your new mortgage
Once you have found a suitable lender, then you are ready to go ahead and sign the contract. This is not a purchase and sale contract, so it does not need to be certified by a notary.
The new lender may insist on a new entry in the land register if you split the mortgage into new tranches, for example, or increase the amount you borrow. Changes to the land register normally incur a fee.
How can I switch financial institution or bank?
To refinance your mortgage, give notice of termination to your old lender and conclude the contract with the new one. The new mortgage lender will handle all other communication and will contact your old lender directly.
This article was first published on 16.11.2020
