Meaning of refinancing

The purchase of a new or older property or the construction of a property is financed using a mortgage. This type of external financing is also referred to as refinancing. Refinancing thus involves the start of an inflow of borrowed capital when buying or building a property. Refinancing includes the combination of equity and borrowed capital. The equity ratio when taking out a mortgage is typically around one-fifth of the amount to be financed. This level of equity should be available to minimize or even eliminate the risk of loan default. With refinancing, the borrower takes the step toward building or buying a property as a fresh undertaking, because refinancing allows the desire for ownership to be put into practice directly. A property is an investment that also implies value appreciation, and at the same time the property serves as collateral for both parties — for the new property owner and for the lending bank. In addition, the borrower's creditworthiness is preserved through the acquisition or construction of a property despite the refinancing. Behind the mortgage is also an investment that leaves the borrower enough freedom in the future to shape their life as they wish. Instead of paying monthly rent, an owner pays a loan or mortgage installment each month roughly equivalent to a typical rent amount. Also, the tax advantages should not be forgotten, which, in the form of annual subsidies, can make refinancing even more attractive. When cumulatively analyzing and evaluating the data and facts, the result often supports undertaking refinancing of this scope as a sustainable and sensible measure. Good advice and an individual analysis of the borrower's personal circumstances are prerequisites for a successful refinancing.

The opposite of refinancing

The opposite of refinancing is the restructuring of existing loans or mortgages. Restructuring is implemented through a debt rescheduling (Umschuldung) or by taking on an additional top-up financing that increases the total volume of the existing loan. This type of financing is also referred to as follow-up financing, and these financing types are the opposite of refinancing.

Requirements for refinancing

The creditworthiness of the borrower is the basic prerequisite for refinancing. Creditworthiness can generally be best assessed by the borrower's main bank, because the bank can analyze and evaluate all cash inflows and outflows. Furthermore, regular monthly income is required for both the self-employed and employees in order for the borrower to obtain approval for refinancing. Assessing creditworthiness includes evaluating possible financial buffer zones. The borrower's liquidity also allows a certain flexibility to adhere to a long-term repayment plan. In addition, with sufficient creditworthiness, potential financial bottlenecks are taken into account so that possible risks during the repayment period are considered.

Financing term for refinancing

When refinancing, the prevailing interest rate level is decisive for the financing term the borrower chooses. At low interest rates, the choice should fall on a longer financing term, because lower rates result in a significantly lower mortgage interest rate and therefore a higher share of repayment from the outset. The financing term can be further reduced over the course of the repayment plan by means of special repayments. It should also be considered whether a fixed interest period or a flexible interest burden is appropriate. With savings built up in a building savings contract or in the form of equity, the interest burden of a mortgage can be settled or paid at the start of refinancing. The advantage here is that mortgage installments can be concentrated on 100% repayment. Planning refinancing before implementation should address these questions so that clear objectives can be set to ensure optimal and secure loan repayment. It is very helpful to devote attention to the financing term in advance and to structure it clearly so that, alongside completing the purchase or construction of a property, not only the physical foundation stands on solid ground, but the financial foundation can demonstrate the same stability. Various scenarios are possible regarding the loan duration and the repayment plan. For every budget and income level, refinancing can be realized because the installment amount and the financing duration can be individually tailored to the borrower's financial means. With concrete and sustainable planning in advance, refinancing should be viewed as a manageable risk. The corresponding equity ratio forms a natural buffer zone to actively steer loan repayment. If the interest on the loan or mortgage can be paid in advance, the financing duration becomes controllable. A change in installments is possible within the financing term if personal circumstances unexpectedly change. With a fixed interest period, up to 2 installment changes are possible and the installment amount can be adjusted by up to 5 percentage points individually. In addition, special repayments of up to 10% of the total volume per year are possible. A fixed interest period should be considered for at least 10 years. However, at a low interest rate level, a fixed-interest period of up to 20 years would be advisable to achieve planning security in terms of total costs. Although a fixed interest period entails minor additional costs, when looking at the final gross sum of refinancing a fixed interest period is the cheaper route. Conversely, a fixed interest period should be avoided if interest rates are relatively high and significant interest rate fluctuations are expected during the financing term. If one foregoes a fixed interest period, it is prudent to initially calculate with a higher interest rate in the planning stage in order to guard against later additional interest burdens.

Possible subsidy options for refinancing

Refinancing can also be carried out with the help of subsidies. One possible subsidy option is loan or mortgage subsidy funds from a state development bank. In addition, grant subsidies can be available alongside refinancing to further reduce the monthly financial burden. Refinancing through subsidy programs is also attractive due to the low interest rate environment, because the installment amount can be flexibly and individually structured thanks to the low interest burden.