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MORTGAGE CONVERSION

When the remaining amount of a real estate loan is financed with a new lender, the process is called mortgage conversion. Debt conversion makes sense if the new conditions are more favourable. Even if the previous lender is not willing to finance the request for a higher loan amount, conversion can make sense.

Mortgage conversion when the fixed interest rate period expires

The simplest type of mortgage conversion is when the fixed interest rate period or term of your previous loan contract period expires and you conclude the new loan / Mortgage contract for follow-up financing with a new provider.

Termination in the event of fixed interest rates or loan terms of 10 years and more

At the end of the 10th year, the borrower is entitled to terminate the remaining mortgage or part of it by exercising the unilateral special right of termination (Section 489 Paragraph 1 No. 2 BGB) without prepayment penalty, subject to a notice period of 6 months. If necessary, the borrower can settle the remaining debt with a new loan from another lender.

Termination of variable rate loans

A borrower can terminate the loan with variable (changeable) interest rate according to § 489 Abs. 2 BGB at any time and free of charge with retention of a three-month notice period.

When does mortgage conversion make economic sense?

A mortgage conversion is definitely worth it if the new lender already offers around 0.1% better interest rate. With a term of 10 years, this can mean savings of more than € 1,000.

The mortgage conversion effort is low

You apply for and sign a loan contract with the new lender for the amount to be financed.
The new lender informs its previous lender about the contract that the mortgage will be paid off at the end of the fixed interest period.
The new lender transfers the outstanding mortgage amount to the previous lender on the day of the mortgage conversion and replaces the old mortgage.

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What are the fees for conversion?

As a rule, both lenders do not charge any fees for the change.

There are only costs for overwriting the land charge in the land register from the previous lender to the new lender, which is around 0.1% to 0.2% of the land charge amount. It pays off with interest savings of 0.05% percent p.a.

Debt Conversion Example

Comparison of offers	previous lender	new lander
Mortgage conversion amount	150.000 €	150.000 €
interest rate or term period	20 Jahre	20 Jahre
Interest rate	2,4%	1,8%
Repayment	3,6%	4,2%
Installments monthly	750 €	750 €
Notary fee	0 €	211 €
Lanf register fee	0 €	177 €
Interest payments for 20 years	41.558 €	28.471 €
Total efforts	41.558 €	28.859 €
Remaining dept after 20 years	11.558 €	0 €
Effort difference	12.699 €
Overall disadvantage	24.257 €

Lessons from the example:

If the house bank / the previous lender is not willing to offer the same conditions as the new lender, it is advisable to convert. In the example above, if the borrower invests the interest rate differential of 0.6% in the repayment, i.e. instead of 3.6% with the house bank with 4.2% with the new lender, and thus repays his loan higher, he can repay the loan amount in full with the new lender within 20 years. After 20 years, the house bank’s offer still shows a residual debt of € 11,558. If the borrower now also compares the interest payments during the fixed interest period of 20 years, it’s clear that financing with the house bank results in an overall disadvantage or to be precise at an expense of € 24,257.

Early loan repayment before the fixed interest period or term expires

Under certain conditions, the borrower can repay his loan contract early if there is a legitimate interest after another use, for example the sale of the property.

Another reason for early termination may be the borrower’s need for more loan that the previous lender is unwilling to provide. If the new lender now wants to finance these funds and needs the loaned property to secure the financing, the previous lender cannot refuse the early loan repayment.

In such cases, if the borrower wants to terminate his loan contract before the fixed interest period expires, the lender will request a prepayment penalty, i.e. the borrower must pay compensation for the losses incurred by the lender.

Avoid prepayment penalty!

There is no prepayment penalty if the fixed interest period is 10 years or more or a loan with a variable interest rate has been agreed.

Even if the cancellation policy is incorrect, the borrower does not have to pay prepayment penalty.

Other reasons can be:

Amicable contract cancelation
When the borrower sells a property and finances an equivalent or more expensive property with the same lender.
Debtor exchange, i.e. the new property buyer replaces the previous borrower in the loan agreement.

Repayment obligation upon termination

With the justified termination, the borrower undertakes to repay the remaining debt or the canceled partial amount within 2 weeks. Otherwise, the termination is considered ineffective and the loan agreement remains in the form in which it was before the termination.

If the lender terminates the agreement early

If the borrower can no longer pay his monthly instalments, the lender can terminate the contract (usually after several reminders). This can be expensive and may lead to loss of property and additional debt. Therefore, you should talk to the lender in good time and look for common alternative solutions. Do not forget that the lender is also interested in a friendly solution.