Renew a mortgage: When the time has come to cancel or change your current mortgage
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Those with mortgages with fixed-rate conditions are often happy when interest rates rise, as the rate of their fixed-rate mortgage remains unchanged. However, in the context of low and declining interest rates, the interest rate of the fixed-rate mortgage is comparatively higher. In such cases, home-owners have the option of replacing their mortgage prematurely in order to change to a different package with better conditions, including the LIBOR mortgage model. Although this is certainly possible in theory, it sometimes involves additional costs and the pros and cons must be weighed.
Cancelling and changing a mortgage prematurely
If you wish to cancel your mortgage early or change it to another model, the option is always available to you. However, it depends on your current mortgage model and how easy the replacement of the mortgage is.
The premature replacement of a variable mortgage is by far the easiest option, since this type of mortgage does not have a fixed maturity date, with only a notice period that has to be observed. In compliance with the contractually agreed deadline, the variable mortgage can thus be terminated and replaced with relative ease.
A fixed-rate mortgage can only be replaced at the end of an agreed-upon term. If you want to redeem your mortgage ahead of time, an early repayment penalty is often brought into play. Usually this prepayment is so high that the withdrawal can cause a lot of financial difficulty, despite the more attractive interest rates for another mortgage model. First, this payment depends on the interest rate and the remaining time on a mortgage. The mortgage manager calculates how much he would have earned through interest payments in the remaining term, deducts a reinvestment interest figure and adds additional processing fees. When switching to another supplier, the penalty payment is sometimes even higher. Combined payments can often total sums in the tens of thousands.
You can easily replace your mortgage at the end of an agreed upon term. If you want to replace your mortgage prematurely, penalties may apply. For LIBOR mortgages however, these are not as high as for fixed-rate mortgages. Often, Libor mortgages are of a more short-term nature, but they can be repaid without the penalty of an early repayment fee. In other cases, payment claims arise. Here too, the contractually stipulated conditions apply. In some cases, the mortgage holder also has to pay for hedging costs or loses privileges granted by the banks.
When is early withdrawal worth the penalties?
The decision to cancel a mortgage and redeem it prematurely is nevertheless worthwhile. The biggest questions to ask is whether the potential savings with the early change to another model works out as greater than the early repayment fee. The potential savings are calculated by diving the interest difference between the new and remaining term of the mortgage to be redeemed. As a rule of thumb, the difference between the interest rate and the existing mortgage is at least 1.5 percent and the remaining time is at least one year. If this is the case, the change is worthwhile. Tip: Depending on the exact situation, you can also claim early repayment fees with the tax and include this in your calculation.
Minimize risk and seek advice
Whatever your situation, you should always strive to minimise the risks by choosing the right mortgage at the right time. Then, close the mortgage if the conditions are favourable. If you follow a few basic strategies, you're well prepared in the event that you prematurely redeem your mortgage.
At MoneyPark, we offer you independent advice and first-rate mortgage consultation. We arrange individual packages and solutions tailored to your needs and strive to find the most favorable mortgage interest rates for you.
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