Follow-up financing: save thousands of euros with top interest rates

Most construction financing involves a fixed interest rate of around 10 to 15 years. However, as the purchase of real estate is associated with a high financial burden, very few borrowers are able to repay the entire amount within this period. Often, a residual debt in the high five- or six-digit range remains after the fixed interest period has expired. Although your bank will most likely make you an offer to continue the loan, you should not blindly accept it. Look at your options and take advantage of favorable construction rates: with good follow-on financing, you can save thousands of euros.

What is follow-up financing??

With an initial repayment rate of two percent, it can take as long as 35 years to pay off your house or apartment in full. Only very few banks allow themselves to be tied down for such a long time to the loan conditions agreed at the outset and instead estimate a fixed interest rate of around 10 to 15 years. After all, the current low interest rates could rise again in the future, and the bank could miss out on some profits if the interest rate is fixed for a long time.

Only very few borrowers manage to pay off the loan in full by the time the fixed interest rate expires. As a rule, you will be left with a residual debt for which you will have to organize follow-up financing. This is a follow-up loan, in which the credit conditions are renegotiated.

Two options for follow-on financing

If you need to arrange follow-up financing, you can basically choose between two different options:

Rollover

In the case of a prolongation, you continue to have your loan with your house bank. About three months before the fixed interest rate expires, your bank will send you a so-called prolongation offer, in which you will find the new loan conditions. The procedure is characterized above all by the fact that it is connected with very small expenditure. As a rule, no new credit check is carried out and there is no need to change the basic debt for which a fee is charged.

Even if the prolongation sounds tempting, you should not rush into it: only in the rarest cases are the credit conditions of the house bank really the most favorable ones. Take your time and request offers from other banks or credit brokers at an early stage. The following example shows how much difference half a percentage point can make in the target interest rate:

Initial situation: remaining debt of 100.000 euros after expiration of the original loan, 10-year fixed interest rate of the follow-up financing, monthly rate of 500 euros.

In the case of genuine forward loans, the interest rate does not start to accrue until the loan is disbursed. If, for example, you agree on a follow-up financing with a 10-year fixed interest rate and conclude the forward loan three years before the rescheduling, you secure the current construction interest rates for a total of 13 years. In the case of non-genuine forward loans, the fixed interest period begins as soon as the contract is signed. Applied to the example above, this means that the actual fixed interest period is only seven years, as it has already run during the forward phase.

Unreal forward loans are not necessarily worse, but when comparing them, you should always compare the actual fixed interest rates of the different offers. This is the only way to ensure that you really do choose the best credit terms.

The right time:
when should i deal with follow-on financing?

When you should consider your follow-up financing depends entirely on your individual situation. If you still have an expensive old loan, you have a special legal right of termination after ten years. In this case, the greatest savings are to be expected, which is why you should immediately request new and more favorable offers.

If the loan has not yet been in place for ten years, you should not start thinking about your follow-up financing until at least five years before the fixed interest period expires. Especially if construction interest rates are expected to rise over the remaining five years, you can secure today's favorable interest rates now with a forward loan. However, it may be worthwhile to wait a little longer. Remember: the sooner you take out the forward loan, the more expensive it will be. No one can predict exactly how interest rates will develop, so there is always a residual risk.

About twelve months before the fixed interest rate expires, you can no longer avoid the issue of follow-up financing. Generally, there are no commitment costs for follow-on financing during this period, so you can get started with research and comparison. It's best to request as many different offers as possible. As with the actual real estate financing, the following also applies here: those who compare secure the most favorable interest rates.

It is not advisable under any circumstances to remain inactive until shortly before the fixed interest rate expires and to wait for the prolongation offer from your own bank. There is a certain calculation behind the fact that you only receive this three months before the fixed-interest period expires: if you do not have enough time to look at competing offers, or if you simply forget, you have no choice but to accept your bank's offer. Therefore, act with foresight, go through all your options and analyze the market.

Compare follow-up financing:
this is how much money you can save

How much money you save on the follow-up financing depends to a large extent on how construction interest rates develop. If you took out your original construction financing at a favorable time and benefited from low interest rates, it may well be that the follow-up financing will be more expensive. Anyone financing a property during a period of low interest rates should bear this in mind when planning their financing strategy. If you plan for only a small buffer and calculate that you will have paid off your house or apartment at the favorable conditions by the time you retire, your optimistic calculation can quickly turn out to be a threat to your existence.

The greatest savings potential, on the other hand, is offered by follow-up financing for real estate buyers and builders whose loan has been running for a long time. This is largely due to the fact that interest rates on construction loans have fallen continuously over the last 10 to 15 years. While interest rates of seven percent were common before the global economic crisis in 2008, you are currently benefiting from historically low interest rates starting at around 0.5 percent.

Here's an example: a borrower took out a construction loan in 2010 with the intention of buying a family home. Due to the high interest rates of 4 percent, a low initial repayment rate of only 1 percent was agreed upon. The borrower pays 1.250 euro. At the end of 10 years, the remaining debt is 263.187 euro. In total, the borrower has about 113.000 euros in fees and interest paid. He is now faced with the decision: reschedule or let the loan continue to run?

Notice period for forward loans

For regular annuity loans: if the loan has already been running for ten years, you have a legal right to cancel the loan. With forward loans, however, this deadline is not always easy to determine. If you have taken out a forward loan in the past and would like to terminate the contract, you must distinguish between two variants:

• Forward loan as a prolongation: if you have taken out the forward loan as follow-up financing with your original lender, the ten-year period begins at the time the contract is concluded. The forward phase will also be taken into account.
• Forward loan as rescheduling: if you have taken out the forward loan in the form of a rescheduling with a new credit institution, the ten-year period does not begin until the payment is made. The forward phase is not taken into account.

Cancellation joker: cancel an expensive real estate loan prematurely

Anyone who concludes a real estate loan agreement can normally revoke it within fourteen days. However, in order for this period to begin, the lender must inform you explicitly and correctly of your right of cancellation. Consumer protection agencies have found in the past that many banks and credit brokers have used faulty cancellation instructions. This means that the fourteen-day revocation period has never begun. Lawyers refer to this as the perpetual right of revocation or the revocation joker.

This would mean: if you have an expensive old contract and the revocation instruction is faulty, you can withdraw from the loan, choose more favorable financing and simply reschedule the loan. However, the opinions of the courts clearly diverge on this: while the european court of justice (eugh) sided with the borrower in a ruling in march 2020, the federal court of justice (BGH) continues to deny the perpetual right of cancellation. A basic decision has yet to be made.

Nevertheless, if you are paying high interest on your real estate loan, you should keep an eye on the situation and possibly have your loan agreement reviewed by a lawyer. With a little luck, you can revoke your loan early and benefit from the current favorable construction interest rates.

Conclusion: save by comparing

Nothing can save you as much money as switching from an expensive real estate loan to a low-cost follow-up loan. Especially if your construction financing has been in place for many years and you are still paying the high construction interest rates of yesteryear, you should carefully explore your options. Thanks to the legal right of special termination, you may be able to benefit from significantly more favorable loan conditions in as little as six months and thus pay off your property much earlier than expected. Find out about your options now and request your individual offer today!