Special circumstances such as job-related relocation, unemployment, illness, divorce or the loss of a beloved partner can force real estate owners to sell the existing property, even if mortgage lending is still ongoing. It is not only important to sell the property successfully, but also the construction loan must be terminated. This comes at a cost, it is important to keep costs as low as possible.
Does it make sense to cancel the ongoing mortgage lending?
If you have sold your property, it makes sense to cancel the mortgage lending and settle the outstanding amount with the proceeds from the real estate sale. This does not always make sense, as the bank may charge costs in the form of a prepayment penalty for the premature termination of mortgage lending. Due to the high loan amount and the long term, mortgage lending is usually set to a borrowing period in which interest rates do not change. During this time it is often not possible to cancel the building loan.
However, if you, as a borrower, can prove that you have a legitimate interest in terminating mortgage lending, which is the case when selling the property, then there is an exception. You can exercise your special right of termination. For you as a borrower this is associated with costs, as compensation for the lost interest, the bank requires from you the prepayment penalty. The amount of this prepayment penalty depends on the interest rate, the loan amount and the remaining term. This prepayment penalty does not apply if the period of the compound interest payment is more than ten years, but the loan has already been disbursed more than ten years ago. In this case, you can terminate the loan with six months’ notice.
How to circumvent the prepayment penalty
The termination of mortgage lending is not always the best decision. If you want to avoid the early repayment penalty, you can transfer the mortgage lending to the buyer of your property, but the real estate buyer and your bank must agree. However, this is not so easy, because the conditions for a new loan cheaper than for your existing mortgage lending, the buyer of the property will not agree. The bank secures itself by checking the creditworthiness of the buyer of your property and will not agree if the property buyer does not have the credit rating.
Also, this debt swap is not completely free of charge, because the bank can be the transfer of the mortgage on the buyer of the property accordingly reward. However, these costs are lower than the prepayment penalty.
In a mortgage exchange, you can continue to pay off your real estate financing and exchange the collateral. If you inherit a property and you have sold your financed property, you can offer the inherited property as collateral. However, the prerequisite is that the inherited property has at least the same value as the property sold. The bank can charge a small fee for this.
Hedging with the prepayment protection for your mortgage lending
In order to avoid the prepayment penalty, you can already arrange a prepayment period upon completion of your mortgage lending, but this is not possible at all banks. If you have agreed such a prepayment penalty, you can also cancel your mortgage lending before expiry of the debit interest commitment without paying a prepayment penalty. The disadvantage, however, lies in an interest premium.