Historically Low Interest Rates: How Borrowers Get Out of Real Estate Loans

Real estate loans are currently more affordable than ever. However, as a rule, borrowers do not come out of current financing, which means that attractive rescheduling is not possible. But there are a few exceptions.

In principle, banks only have to agree to a premature cancellation of real estate loans with indemnity payments if the borrower has a legitimate interest. A legitimate interest exists if the financed property is sold or the bank refuses an additional real estate loan (eg for a modernization). The meanwhile lower level of interest rates does not justify a legitimate interest.

Disclaimer makes lending unattractive

Otherwise, a cancellation is only possible at the end of the agreed fixed-interest period, but at the latest ten years after the complete disbursement. In the absence of a legitimate interest in a loan, the Bank may determine the compensation at its reasonable discretion. As a rule, even the debt restructuring in the most favorable loan available on the market is no longer worthwhile. In practice, borrowers in the case of applications for cancellation without legitimate interest must expect that the bank will not react at all.

If there is a legitimate interest, a cancellation with a six-month period is possible. Even then, the bank may demand compensation, but must comply with certain rules in its calculation. Thus, only certain comparative interest rates may be used. Also, in assessing the compensation, the bank must assume that the borrower would have used all the special payments due to it.

Compensation is often 20% of the remaining debt

The low level of interest rates is driving up the payments. In January, Wirtschaftswoche, citing consumer estimates, reported that compensation in the current market environment often accounts for 17 to 20 percent of the remaining debt. It is recommended that the estimated compensation be assessed by consumer protection organizations. These usually require fees of between 50 and 100 usd.

The fact that the compensation is so lucrative is due to the very low rate of return of mortgage Pfandbriefe. This current yield is assumed to be a reinvestment rate, which the bank can achieve with the early repayment of the loan.

Faulty cancellation policy as a late good luck

However, some of the fixed-rate borrowers are free to make any kind of compensation and can terminate at any time. Last summer, consumer centers reported erroneous revocation policies in many loan agreements. Until a valid instruction is received, borrowers can return their loan at any time.

The consumer center Hamburg had examined 300 loan agreements at that time and classified more than two-thirds of them as faulty. Christian Schmidt-Burgk, mortgage lending expert at VZ HH, was quoted in the Handelsblatt: “If the cancellation policy is incorrect, the revocation period will not start, so the revocation of the credit agreement can be declared at any time”. Affected customers should not cancel their loan agreement, but revoke it.