Refinancing your mortgage early: your way to lower interest rates
07.06.2025
11
Minutes
Katrin Straub
Managing Director at nextsure
Are your mortgage interest rates high, but the fixed-rate period still runs for years? Many borrowers do not know that there are legal ways to refinance a mortgage early and thus significantly reduce the monthly burden. Discover your options for benefiting from current low interest rates.
The topic in brief and concise terms
After ten years’ term, you can terminate your mortgage financing thanks to the special right of cancellation (§ 489 BGB) with six months’ notice and no additional costs.
Debt refinancing often pays off even with an interest rate difference of just 0.2 percentage points, as the savings over the years can be significant.
The prepayment penalty demanded by the bank should always be checked, as it may be unenforceable due to BGH rulings in cases of unclear contractual clauses.
Early refinancing: When is it possible to exit a construction loan?
Early refinancing of a home loan means replacing an existing loan with a new one on better terms. As a rule, this is only possible without additional costs after the agreed fixed-interest period has expired. However, there are three key exceptions that make earlier refinancing possible. An interest saving of just 0.2 percentage points can already justify refinancing.
The first and most important option is the statutory special right of termination after ten years. Secondly, if you sell your property, you can often exit the contract, but you may have to pay an early repayment penalty. The third option is the strategic use of a forward loan to secure today’s interest rates for the future. These options open up ways to save thousands of euros over the remaining term.
Knowing the exact conditions and deadlines is the first step towards optimising your financing.
Make use of the special right of termination under Section 489 of the German Civil Code for maximum flexibility
The German Civil Code (BGB) gives borrowers a powerful lever in Section 489. Regardless of your contractually agreed fixed interest period, you can terminate any home loan after ten years. This period begins exactly one day after the loan amount has been paid out in full. If, for example, you received the final instalment on 15 May 2015, you can terminate from 16 May 2025.
A notice period of six months applies to the termination. This means you submit the notice and can, after a further six months, repay the remaining debt to the bank without incurring an early repayment penalty. This right is available only to you as the borrower, not to the bank. For follow-on financing or extensions, the ten-year period even begins on the date the contract is signed. A careful review of your home financing documents is crucial here.
This regulation creates a reliable basis for planning a cost-effective refinancing.
Early repayment penalty: avoiding cost traps when refinancing
If you terminate before the fixed-interest period expires and outside the ten-year window, the bank will demand compensation for the interest it has lost. This early repayment compensation can quickly amount to several thousand euros. The bank calculates its loss by determining the difference between your contractual interest rate and the current interest rates for reinvestment in secure mortgage bonds.
However, banks’ claims are not always correct. The Federal Court of Justice (BGH) has strengthened consumers’ rights in several rulings. On 3 December 2024, the BGH ruled (case no. XI ZR 75/23) that the claim to compensation lapses if the contractual clauses for calculating it are not clear and understandable for consumers. An incorrect cancellation notice in the original contract can also be a way to avoid payment.
Our expert tip: Always have the calculation of the early repayment compensation checked by an independent party. Even small errors in the calculation can reduce your costs by ten per cent or more.
A careful review of the contract details is therefore essential in order to identify and avoid unnecessary costs.
Strategic planning: Secure today’s interest rates with a forward loan
A forward loan is an effective instrument for securing today’s interest rates for a future follow-on financing. You take out a loan agreement today, but it will only be paid out in up to 66 months’ time. This is particularly useful if you are planning to remortgage in the coming years and expect interest rates to rise.
For this interest rate certainty, banks charge a moderate interest rate premium. This premium increases with the length of the lead time (forward period). The advantage lies in the absolute certainty of planning your future monthly instalment. You can watch the current building loan interest rate trend with peace of mind, as your interest rate is already fixed. The costs for updating the land register when remortgaging to a new bank are manageable and amount to around 200 euros for a loan of 100,000 euros.
The decision in favour of a forward loan requires careful consideration of interest rate trends and your personal willingness to take risks.
6 steps to successfully refinance your home loan
Careful preparation is the key to successfully remortgaging your mortgage. The following guide will help you keep track:
Check the contract documents: Determine the end of your fixed-rate period and the date on which the special cancellation right after ten years applies.
Determine the outstanding balance: Ask your current bank for the exact amount of the outstanding balance at your desired refinancing date.
Compare offers: Obtain at least three comparison quotes for a new mortgage. Pay attention not only to the interest rate, but also to options for special repayments.
Cost-benefit calculation: Compare the savings from the new, lower interest rate with the costs involved (e.g. early repayment charges, land registry fees). A refinancing often makes sense even with an interest rate difference of just 0.2 per cent.
Cancel the old loan: Submit the cancellation in writing and within the required notice period to your old bank. It is best to send it by registered post.
Conclude the new contract: Sign the new loan agreement and initiate the loan redemption. The new bank transfers the outstanding balance directly to the old bank.
This structured approach ensures that the switch goes smoothly.
Expert tips: How to maximise your savings when refinancing
In addition to the well-known routes, there are further levers to get the maximum out of your refinancing. One often overlooked point is negotiating with your own bank. Present your adviser with a competing offer; sometimes you will receive better terms to keep you as a customer. This saves you the costs of changing banks.
Another important point is a precise analysis of the total costs. Take into account all fees incurred, not just the obvious nominal interest rate. Here are some points you should check:
Special repayment rights: Can you make extra repayments of at least five per cent of the loan amount each year under the new agreement?
Repayment rate changes: Does the new agreement allow the repayment rate to be adjusted, for example twice during the term?
Commitment interest: How long is the interest-free period if you do not draw down the loan in full immediately?
Account management fees: Does the new bank charge fees for the loan account?
Our expert tip: Check your old loan agreement for formal errors, especially in the information used to calculate the prepayment penalty. A Federal Court of Justice ruling from late 2024 has significantly raised the transparency requirements, giving you a strong negotiating position.
At the end of the process comes the most important decision: choosing the right partner for your financing.
Early refinancing of your mortgage is a major opportunity to improve your financial situation in the long term. However, the process also involves complexity and requires a careful analysis of your personal situation and the legal framework. Professional advice protects you from costly mistakes and ensures that you find the best possible solution for your needs. Have your insurance situation checked free of charge and receive specific recommendations for optimisation.
More useful links
Wikipedia offers general information on property financing.
The Consumer Advice Centre answers frequently asked questions about property financing.
The Consumer Advice Centre provides information on early repayment of a mortgage loan without additional costs.
The Consumer Advice Centre Schleswig-Holstein offers information on refinancing and follow-on financing of property loans.
Statista provides statistics on the development of mortgage rates in Germany.
Statista offers statistics on interest rates for housing loans to private households in Germany.
The Bundesbank publishes statistics on interest rates for housing loans to private households.
The Bundesbank provides data on interest rates for housing loans as part of the housing property market indicator system.
The Consumer Advice Centre explains how impermissible fees charged when refinancing a mortgage loan can be reclaimed.
FAQ
How can I remortgage my property loan early?
You have several options: the most cost-effective is termination after ten years of the term in accordance with Section 489 of the German Civil Code (BGB). Alternatively, if you sell your house, you can refinance, but you will have to pay early repayment compensation. If your fixed-rate period is ending soon, you can secure the current interest rates with a forward loan.
Is refinancing always worthwhile?
No, refinancing only makes sense if the interest savings from the new loan exceed the costs incurred (prepayment penalty, fees). A rule of thumb is that switching can be worthwhile from an interest rate difference of 0.2 percentage points.
What happens if I miss the notice period for the special right of termination?
The special right to terminate under Section 489 of the German Civil Code does not expire. You can also terminate at any time after eleven, twelve or more years with six months' notice. So you do not need to meet an exact cut-off date.
Can the bank refuse a debt restructuring?
Your old bank cannot refuse the termination after ten years. However, a new bank can reject your application for refinancing if your creditworthiness has deteriorated or the value of the property has fallen.
Do I have to go to a notary for refinancing?
Yes, if you change banks, the land charge in the land register must be transferred from the old bank to the new bank. This requires notarial certification and an entry by the land registry office.
Can I also refinance a KfW loan?
Yes, KfW loans can generally also be refinanced. However, an early repayment here also incurs an early repayment penalty, the terms of which you must enquire about directly with KfW.
