Refinancing a German mortgage: why prolongation and switching lender are two different checks.

What a refinancing is and when it comes up

A German property loan has two terms that are often confused: the time until full repayment and the fixed-interest period, during which the rate is locked. If the fixed period ends before repayment, which is the normal case with ten or fifteen years, the outstanding remaining debt needs a new interest agreement. That is the Anschlussfinanzierung. Economically it is not a new loan, the money was paid out long ago, but a new agreement on the price for the time that follows.

Three forms are common. A prolongation is the continuation with your existing bank at a new borrowing rate and a new fixed period; the land charge stays where it is. Switching lender (Umschuldung) means a new bank repays the remaining debt to the old one and takes over the land charge. A forward loan fixes one of the two variants months or years before the fixed period ends, for a premium for the waiting time. Which variant fits is decided by the remaining debt, by your income and by how each bank checks.

How much is still outstanding at the end of the first fixed period depends almost entirely on the initial repayment rate. In our guide to the annuity loan we worked it through at a 3.5 percent borrowing rate: after ten years, around 88 percent of the loan amount is still outstanding at one percent initial repayment, around 76 percent at two percent, around 64 percent at three percent. A refinancing therefore usually concerns the larger part of the original loan, not a remnant. The exact figure comes from the repayment schedule, which every borrower can request at any time (Section 492 (3) BGB).

Three months before: what the bank must do and what it need not

The most frequent question about refinancing is whether the bank has to make an offer. The answer is a single sentence of the statute, and it is shorter than many expect. The lender “informs the borrower at the latest three months before the end of the fixed-interest period whether it is prepared to agree a new fixed rate” (Section 493 (1) BGB, our translation). If it is prepared, the notice must state the borrowing rate offered at that time. That is all. There is no duty to continue, and no duty to offer a market rate. BaFin states on its consumer page that the existing lender is “not obliged to offer a prolongation at the best conditions” (BaFin, Anschlussfinanzierung, in German).

This leads to an attitude we regularly have to correct in consultations: the prolongation offer is an opening offer, not a finding. It arrives at the latest point the law allows, it names the rate the bank would like to offer on that day, and it counts on the majority signing. Anyone who starts thinking about the refinancing at that moment negotiates under time pressure. Anyone who already has the figures negotiates with a comparison in hand.

The other side of the mechanism is the right of termination, and it is more generous than often assumed. If the fixed period ends before repayment and no new rate has been agreed, the borrower may terminate “with one month's notice, at the earliest for the end of the day on which the fixed-interest period ends” (Section 489 (1) no. 1 BGB). No early repayment penalty is due, because it can only be charged if a fixed borrowing rate is still owed at the time of repayment (Section 502 (1) BGB). The duty that goes with it is in paragraph 3 of the same section: the termination “is deemed not to have been made” if the amount is not repaid within two weeks of it taking effect. The new financing therefore has to be in place before the termination takes effect, not afterwards.

Prolongation and switching lender are two different checks

This is the section that is missing from guides on refinancing, and it explains both the convenience of prolongation and the advantage of switching. Prolongation and switching are usually presented as two offers for the same thing that differ only in the rate. Legally they are two different processes with two different checks, and that changes who benefits from which route.

Before every consumer loan contract the bank must assess creditworthiness (Section 505a (1) BGB). For a property loan this happens “on the basis of necessary, sufficient and appropriate information on income, outgoings and other financial and economic circumstances”, and the assessment “may not rely predominantly on the value of the residential property exceeding the loan amount” (Section 505b (2) BGB). That is the affordability assessment a new bank carries out in full when you switch: proof of income, outgoings, existing commitments, plus its own valuation of the property. A higher property value is expressly no substitute for a sustainable income.

For a prolongation there is an exception that hardly anyone knows. For property loans that, “following a loan contract concluded between the same parties, grant a new right to use capital” for the same purpose, “a new creditworthiness assessment is required only” if the net loan amount is increased significantly (Section 505a (3) in conjunction with (2) BGB; identical wording in supervisory law, Section 18a (2a) KWG). At a plain continuation your existing bank therefore does not have to open a new affordability assessment. Two limits belong to that: it may not conclude the new contract if it “already knows” that the customer cannot pay permanently, and according to BaFin every lender in any case reviews “at least once a year” whether the loan can be repaid, and in doing so also assesses the security. The widespread claim that no check at all takes place at a prolongation is therefore wrong. What is right is that no new contract check with fresh documents takes place.

The conclusion we write down in consultations: Who benefits from which route depends on what has changed more since the original contract. If property and remaining debt have moved in your favour, value up, debt down, then only the new bank's full assessment brings that advantage into the rate, because only it revalues. If your income has changed for the worse, through self-employment, parental leave, part-time work or approaching retirement, then prolongation is the route that does not turn that change into a hurdle. Two checks, two target groups. The same prolongation offer can be too expensive for one household and the best achievable solution for another.

The loan-to-value ratio has fallen, but only a switch counts it

The loan-to-value ratio, in German Beleihungsauslauf, is the loan relative to the lending value of the property, and alongside the market level and the length of the fixed period it is the most important pricing factor of a mortgage. Many lenders price in bands by that ratio: the smaller the loan's share of the lending value, the better the band. At the original contract the ratio was high because the loan was new. At the refinancing it is markedly lower because ten years of repayment lie in between, even if the lending value has not changed.

How far the ratio has fallen can be read from the remaining debt. The table takes the figures from our annuity loan guide (3.5 percent borrowing rate, ten years) and assumes an unchanged lending value. The three right-hand columns show where the ratio stands after ten years if it started at 100, 90 or 80 percent:

Two things are in there. First: a financing that started at a 90 percent ratio and two percent repayment stands at around 68 percent after ten years. With three percent repayment and an 80 percent start it is around 51 percent. That is typically one or two bands lower than at the original contract, without the property value having to have risen. If it has risen, the effect is stronger. Second: this advantage only arrives where the property is revalued. The new bank revalues because it has to assess. Your existing bank does not have to at a prolongation, and as BaFin observes, it “often falls back on existing information”. Whether it prices the lower ratio into its offer is up to it. If you choose prolongation, you should therefore calculate the current ratio yourself and put it on the table, rather than assume it.

This gives you a lever before the deadline: an unscheduled repayment shortly before the fixed period ends lowers the remaining debt and with it the ratio at exactly the moment it is reassessed. If it is enough to skip a band, it works for the entire new fixed period. That is one of the few cases in which an unscheduled repayment delivers more than its pure interest saving.

When prolongation is the better route

Prolongation has a poor reputation on comparison portals because it often does not come out ahead on rate alone. That is a shortcut. Prolongation is the continuation of the loan with your existing bank without a new contract check, without assigning the land charge and without time pressure. In four situations it is not the comfortable choice but the right one:

• Your income has changed: Self-employment, parental leave, part-time work, approaching retirement or a second salary that has fallen away pass the new bank's full check less well than a continuation with the old one. Then prolongation is not the comfortable option but the realistic one.
• The remaining debt is small: The cost of switching is fixed, the rate advantage is a percentage of the remaining debt. The smaller the debt, the larger the rate gap has to be for a switch to pay off. With a short remaining term the sums tip quickly.
• Contract rights should carry on: Generous unscheduled repayment rights, a change of repayment rate without surcharge or a land charge already increased for a later project are often easier to keep with the existing bank than to renegotiate.
• Time is short: If the fixed-interest period ends in a few weeks, that is rarely enough for documents, valuation and assignment at a new bank. Then a short prolongation with a short fixed period is the way to buy time for a proper comparison.

Even in these cases the prolongation offer remains negotiable. The bank knows what switching costs, and it knows that the assessment hurdle is higher for a switch. Anyone who comes to the meeting with the current ratio, the repayment schedule and a comparison offer negotiates on the strength of the figures, even if a switch is not an option in the end. Whether an independent broker or your own bank is the better address for that we weighed up openly in our guide your bank or a broker.

What switching costs: assign the land charge, do not cancel it

Switching lender means a new bank repays the remaining debt to the old one. For that it needs the same security the old bank had: the land charge in the land register. The expensive route would be to cancel the old land charge and register a new one. The usual route is assignment. The provisions on mortgages apply to the land charge accordingly (Section 1192 (1) BGB), and for an assignment a written declaration with handover of the certificate, or registration of the assignment in the land register, is sufficient (Section 1154 (1) and (2) BGB). The old bank assigns the land charge to the new one, the entry in the land register remains, only the creditor changes.

What that costs follows the German Court and Notary Costs Act and the amount of the land charge, not the remaining debt. The order of magnitude is well under one percent of the land charge amount, and far below what cancellation and new registration would cost. What other options exist for the land charge and why it is often left standing after repayment is explained in our guide cancel or keep the land charge. BaFin names the transfer costs as the item that affects total cost when switching lender, and that is exactly how they belong in the sums: a fixed amount against a rate advantage that grows with the remaining debt and the length of the new fixed period.

Two items do not arise when you switch at the end of the fixed period. There is no early repayment penalty, because no fixed borrowing rate is owed any more at that point (Section 502 (1) BGB). And no property transfer tax or notarial property contract is needed, because no ownership changes. What the new bank asks for instead is complete documentation of income and property, because under Section 505b (3) BGB it is obliged to verify the information “where necessary also by inspecting independently verifiable documents”. Which documents those are is set out in our guide to the documents for a mortgage. Once a concrete offer is on the table, you can ask for the draft contract (Section 491a (2) BGB) and compare it with the prolongation offer clause by clause.

Forward loans and the right to terminate after ten years

Two tools frame the refinancing in time. A forward loan secures the rate for a refinancing that only begins in months or years, for a premium for the waiting time; whether and when that premium pays off we covered in detail in the forward loan guide and do not repeat here. The second tool is the statutory right of termination: “in any event after ten years from full receipt, with six months' notice” (Section 489 (1) no. 2 BGB), in whole or in part, without early repayment penalty and without the contract being allowed to exclude or impede it (Section 489 (4) BGB). With fixed periods of fifteen years or more, it is the route into a refinancing before the fixed period ends.

One detail of that provision does not appear in guides, although it applies to every refinancing: “if, after receipt of the loan, a new agreement is reached on the time of repayment or the borrowing rate, the date of that agreement replaces the date of receipt” (Section 489 (1) no. 2 sentence 2 BGB). With a prolongation the ten-year period therefore starts afresh, from the day of the new agreement. Read literally, for a forward prolongation with the same bank that means the period runs from the signature, not from the start of the new fixed period. When you switch to a new bank, the new contract is a separate loan whose period begins with its full disbursement. Anyone who wants to keep the option of a later exit with a long follow-on fixed period should know this difference and check in the contract which date the period refers to.

What remains if no bank follows on

The worry of standing there without a refinancing at the end of the fixed period is widespread and in most cases unfounded once you know the order of the checks. A refusal usually comes from the new bank, which assesses in full, not from the existing one, which does not have to open a new affordability assessment at a plain continuation (Section 505a (3) BGB). The limit lies where the bank “already knows” that the instalments cannot be carried permanently, for instance after repeated arrears. As long as that is not the case, the prolongation offer is the fallback, and it is to be negotiated, not declined.

If a switch fails on the affordability assessment, look at what was calculated there. Living-cost allowances, the treatment of variable income and lending limits are each institution's own rules, not law, and they differ noticeably. A refusal is therefore one bank's assessment result, not a market result. Before that lie three levers: lower the remaining debt with an unscheduled repayment from savings, which cuts ratio and instalment at once; bring in an additional security or a co-borrower; or set the initial repayment of the refinancing lower, which reduces the instalment and extends the term. How a bank sets the instalment against income is explained in our guide how much house you can afford. Selling the property is the last resort, and BaFin expressly advises preferring it to a forced sale because it preserves the proceeds. Why one bank's refusal need not be the end of the financing and which kind of enquiry protects your credit score is explained in our guide financing declined.

What to take away from this guide

• A refinancing is the new interest agreement for the remaining debt after the fixed period. After ten years that is still around 88, 76 or 64 percent of the loan at one, two or three percent initial repayment.
• Section 493 (1) BGB obliges the bank to say three months in advance whether it is prepared to continue. It does not oblige it to make an offer, let alone a market-rate one. The prolongation offer is an opening offer.
• Prolongation and switching are two different checks: no new creditworthiness assessment at your existing bank without a significant increase (Section 505a (3) BGB), full assessment of income and property at the new bank (Section 505a (1), Section 505b (2) BGB).
• Who benefits is decided by what has changed more: property and remaining debt favour a switch, a changed income favours prolongation.
• The loan-to-value ratio has fallen markedly after ten years of repayment, from 90 percent to around 68 at two percent repayment. That is only priced in where the property is revalued. An unscheduled repayment before the deadline can skip a band.
• Switching costs the assignment of the land charge (Sections 1154, 1192 BGB), not cancellation and new registration. No early repayment penalty and no property transfer tax arise when switching at the end of the fixed period.
• Termination at the end of the fixed period with one month's notice, after ten years with six months' notice (Section 489 (1) BGB), repayment within two weeks (paragraph 3). With every new rate agreement the ten-year period starts afresh (no. 2 sentence 2).

ME Finance is not a bank. We compare offers from more than 500 banks and lenders and, at a refinancing, set your bank's prolongation offer against a switch, using your current loan-to-value ratio and your affordability assessment. How the process works is on our page on refinancing. We take your key figures through the no-obligation enquiry.