Repaying a mortgage: when does it make sense and how does it work?

Repaying your mortgage and switching banks requires good planning. Find out what is important when repaying a mortgage, what options you have when switching mortgages, and when this step is financially worthwhile.

If you want to repay your mortgage, you have the option of choosing a new mortgage model or switching to another lender. A number of factors need to be taken into account. For example, you will need to check under what conditions you can repay the mortgage and what fees you will incur for doing so before the term.

Plan your mortgage repayment at an early stage

You can either terminate your mortgage at the end of the term or you can opt for early repayment. In this case, you may have to pay an early repayment penalty to the bank. This could be worthwhile, depending on the new mortgage offer.

Ideally, you should start planning around 12 to 18 months before you want to repay your mortgage. This will give you enough time to find a best possible follow-up mortgage. You should bear in mind that the interest rate situation on the mortgage market may change during this period. Talk to your mortgage advisor about possible market trends.

When is the ideal time to repay a mortgage?

If your mortgage is due to mature soon, it’s time to consider whether you want to extend your mortgage with the same bank or repay it and switch to another bank.

What should I do if I want to repay my mortgage?

Mortgage repayment basically always works in the same way:

1. Start by clarifying at an early stage whether it is worth switching mortgage providers. Recommendations vary, but the advised time frame is usually 6 to 18 months before the existing mortgage matures. During this period, you can compare the conditions offered by different providers.
2. Check the conditions of your current mortgage contract. The notice period is particularly important.
3. Make sure you keep all the documents that are relevant to the mortgage in a dossier ready to hand. This will enable financial institutions to provide you with suitable financing offers.
4. Discuss the financing options with your bank and, where applicable, also with the bank you wish to switch to. Of course, you can also ask several providers for offers and then choose the best option.
5. You should request binding financing offers so that you can compare them. Ask if anything seems unclear.
6. Terminate your existing mortgage at the end of the term, respecting the applicable notice period. Depending on the situation, it may be possible to repay the mortgage early by selling the mortgage along with the property.

Whether or not early repayment is worthwhile depends largely on how long your current mortgage has left until the term. If it is not due to mature for several years, the early repayment penalty can be very high. This applies in particular to fixed-rate mortgages with a long term. This is because if you want to switch your mortgage early, the bank will lose the income from the interest that it was entitled to expect on the basis of the legally binding contract you signed. The bank will now invest the borrowed money on the market instead, where the interest income is lower. This means that the bank will earn less. The bank can charge you for this deficit. The fee will be higher or lower depending on the remaining term of the mortgage. But quite often, it can still be worth going ahead. This is the case if the interest savings on the new mortgage exceed the early repayment penalty.

In principle, it is possible to pay off a single tranche of your mortgage and switch to another bank, but only if you have a split mortgage. The remaining tranches then remain with the old bank until the end of the term.

It is important to point out that the mortgage lien (i.e. the mortgage note) on your property, which the bank uses as security for the mortgage debt, is not normally divided between individual mortgage tranches. The previous bank must hand over the mortgage lien to the new provider as soon as it has received an irrevocable promise to pay from the new provider. Otherwise, the new provider will not be able to grant you a mortgage.

If, for example, you want to remain with your current provider because of the costs of an early repayment penalty, you can choose to split your mortgage. However, this is associated with costs.

There are a number of factors to consider if you want to repay your mortgage and switch banks. The most important thing to do if you are thinking of repaying a mortgage is to find out about alternatives and conditions at an early stage. It is best to obtain detailed advice, especially if you want to switch mortgages before the term. Don’t be afraid of negotiating good conditions. Ultimately, there are many options for switching mortgages, and mortgage providers are always open to discussing the situation.