What is debt consolidation?
A consolidation means the conclusion of a new loan agreement on more favorable terms. Often a debt consolidation is associated with a change of the banking institution. However, this step is only necessary if your current bank does not offer you an attractive offer. Anyone who completes mortgage lending ties themselves to the loan for a long time due to the fixed interest rate commitment , which is usually between five and 30 years. After that, a construction loan is still often not completely paid off. This means that as soon as the interest rate lockout expires, a residual debt must be further financed – follow-up financing is required. In most cases, follow-up financing offers are more attractive to other banks than their own bank. consolidation, where you switch lenders and replace the existing loan with a new one, is often a good way to pay off the remainder of your debt.
The current interest rates are very low, so it offers for real estate buyers to take a look into your contract documents. If you have completed your construction loan at a much higher interest rate, you can save a great deal of money by consolidation the real estate financing. Even a few tenths of a percent brings a significant cost savings. A debt consolidation during the fixed interest rate is not so easy: Mortgage lending can not be terminated without further notice.
Remortgage: how to really save
When consolidation, you usually change the bank and thus the creditor, who was previously registered for the construction loan in the land register. It is replaced by the new creditor. The change of the land register must be made by a notary and both the land registry and the notary keep the wallet. As a rule, these additional costs amount to about 0.3 percent of the loan amount. Assuming your remaining debt is still 180,000 euros, then you would have to raise 540 euros for it. If you repost your building loan and get a better borrowing rate on land, you have the fees quickly recouped, as our sample bill shows. Here you see: If the borrowing rate is only 0.3 percent per year better (1.3 instead of 1.6 percent), you save 4.879,61 Euro interest costs within ten years. Of this, you still have to deduct the 540 euros of notary and land registry fees, but there remains a profit of 4,339.61 euros, which you generate with a consolidation.
Optimize loans through consolidation
Follow-up financing gives you a unique opportunity to optimize your current financing. Because things may have changed in the past with you. Maybe you will earn higher incomes or have now saved something that can now go into mortgages. With a consolidation you can adjust the mortgage lending of your life situation. First of all, check two variables: the monthly rate and the repayment rate. The currently low interest rates give you various options.
Variant 1: keep monthly rate, pay more
You keep your monthly installment when consolidation. Due to the lower interest rate, a larger part is automatically used for the eradication . So you pay off your loan faster, shorten the term and are faster in this way debt-free.
Option 2: Lower monthly payments for more financial freedom
The lower interest rates put you in the position debt consolidation, reduce your monthly payments, but still just as fast to pay off as before. This option is useful if you want to reduce the financial burden and get more space every month.
Variant 3: Choose a longer fixed interest rate
With the interest rate advantage, you could also opt for a longer fixed interest rate of up to 30 years. You get the consolidation from the outset offered a better interest. However, longer interest rates increase interest rates again. In the end, you will probably receive the same interest rate as before, but long-term interest rates will provide greater planning certainty. You switch off the interest rate risk over a long-term consolidation.
Variant 4: Install more extras
Many special conditions cost extra for mortgage lending. For example, if you want to make more special repayments than just the standard five percent per annum per year, this special option increases the borrowing rate. If you receive a lower rate of interest from consolidation, such opportunities are suddenly open to you.
When a consolidation is possible
In order to reschedule mortgages, a new loan agreement must be concluded and the old one terminated. Before expiry of the debit interest payment, a cancellation of the construction financing is only possible in exceptional cases. On the other hand, with the expiry of the debit interest payment, you have practically a free hand.
Reposting mortgage lending before expiry of the borrowing rate commitment
To terminate the contract prematurely before expiry of the debit interest is generally only possible in three cases:
- You want to sell the property: You are always free to sell your home. In this case, the bank is required to discharge you from the associated loan agreement, but may charge you a prepayment penalty .
- You need additional funding : you want to increase the loan to make a conversion that has become necessary due to changes in your private life. Sudden need for long-term care is a good example for this, then the apartment usually has to be converted barrier-free. If the bank is not willing to grant you a higher loan, although this would be purely mathematically possible, you usually have a right of termination. Again, the bank will levy a prepayment penalty.
- Your credit has been running for more than ten years: According to legislation (Section 489 BGB), you can cancel your mortgage lending anytime after ten years with six months’ notice, free of charge. In this case, the bank may therefore not charge a prepayment penalty. It does not matter which fixed interest rate you defined at the beginning. Even mortgage lending with a 30-year fixed interest rate can thus be terminated after ten years.
Reverse mortgage lending after expiry of the borrowing rate commitment
After expiry of the set fixed interest rate you can make your mortgage refinance easily. It is important that you are aware of the time. Have a look at your loan documents and note the time when the debit interest expires, as a reminder in your calendar. Even before the interest rate commitment expires, it makes sense to think about follow-up financing.
Advantages of debt consolidation at a glance
The consolidation of mortgage lending brings several advantages, which we have already explained in the previous text. Below we have summarized all the positive effects for you.
Less interest costs, pay off faster
The interest rate is currently very low. You can use this for both a prolongation , ie the extension of your mortgage lending at the old bank, as well as a consolidation of a new bank. However, offers from other banking institutions are often better. Therefore, take a close look at the market situation. Because a better debit interest not only helps you to save interest costs. It also gives you the ability to pay faster without having to pay a higher monthly installment. This alone can make the transition to a new provider doubly worthwhile.
Starting with a difference of 0.2% to your current interest rate, the interest savings exceed the switching costs in the form of prepayment penalty.
Low loan amount reduces financing risk
If you repost your mortgage, the amount of the residual debt is less than the loan amount you raised for your initial funding. For the bank, a high loan amount means a higher risk, which means that the interest on the loan is higher. Conversely, this means: If your loan amount has dropped, which is the case with your remaining debt, the interest rate is set lower from the outset. At the same time, the loan-to-value ratio, ie the ratio between the loan taken up and the mortgage lending value, is changing, with the result that the bank is issuing better interest rates.
Overview of the finances
If multiple loans are combined through a consolidation, you get a better overview of your finances. Instead of paying several installments of different loans to the banks, now only one installment to one bank is needed. As a result, you have planning security and an overview of your monthly spend over the life of the new loan.