Early settlement of mortgage

16 posts in this topic

Hi,

 

I bought a property 7 years ago and now we will be leaving Germany next year. If we sell and attempt to settle the mortgage early do we still have to pay the interest back to the bank. The origianl mortgage agreement was for 10 years and we could at the end of the period re mortgage re neogoiate the remainder.

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it depends on what it says in the fine print. By default, they charge a penalty unless you negotiate that out. Banking in Germany is not very consumer friendly so if you didn't negotiate it most likely you will have to pay something to the bank to pay it off early. Best to call them or read the loan agreement.

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yes, probably you will have to compensate them for lost profit ("Vorfaelligkeitsentschaedigung"). But you could ask the buyer to take over that loan and deduct it from the purchase price. Might save him fees for bond registering etc.

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Hi,

 

I bought a property 7 years ago and now we will be leaving Germany next year. If we sell and attempt to settle the mortgage early do we still have to pay the interest back to the bank. The origianl mortgage agreement was for 10 years and we could at the end of the period re mortgage re neogoiate the remainder.

 

The main problem is that 7 years ago interest rates were significantly higher than now. Hence the bank makes a loss in their books if they have to take the money they have lent from you back and needs to lend it out again to someone at current interest rate level. This loss is what they will charge you as so-called "Vorfälligkeitsentschädigung". you can actually ask them to compute it for you upfront so that you know for sure what you are facing. Because of the difference in interest rate there won't be also any buyer interested in taking over your mortgage.

 

You should also check the tax side. If you have been living these past years in the property, I think you are not liable for capital gains tax on any profits you make thru the sale - but you better have that checked, too, before you actually sell it.

 

Cheerio

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If you repay the principal amount outstanding before the expiry of the agreed term for the fixed interest rate you won’t have to pay the remaining interest amounts. Normally your lender will charge, as pointed out in the posts above,a Vorfälligkeitsentschädigung as compensation for the loss of earnings due to the early redemption.

As Starshollow explained, this will depend on the difference between interest rates at the inception of your loan and at the time of early redemption.

If for instance you took out a 10 year loan at 5.00%p.a and decide to repay 3 year before the agreed date, the bank will say: how do I invest this extra money for the next 3 years? It will look at the prevailing 3 year interest and if they are lower, let’s say 1.50% will ask you for the difference.

A rough calculation would be: (5.00%-1.50%) x 3 year x loan amount still outstanding i.e. approx. 10.50% of the repayment amount.

Just to anticipate the inevitable comments from finance whizz kids – for the sake of simplicity I intentionally didn’t consider the (probably) decreasing principal amount for the remaining three 3 years and PVing the cash flow.

What should be considered though is that the while the lender will in principle follow the above concept, it will also try to make as much hay as possible from this occurrence and unnecessarily inflate the resulting amount.

As for the tax side, if the flat was for your exclusive private use for at least the past two years immediately preceding the sale there is not capital gain tax payable in Germany. Depending on the country you’re moving to and the timing of the sale there may be a tax liability in your new jurisdiction.

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Hi All,

 

I thought there was a law that mentioned you could payback the full loan after 10 years without Vorfälligkeitsentschädigung. am i right?

 

I'm trying to secure a 20Y loan and hopefully i could pay it back earlier ( depending on how interest% risk goes, though i assume it will end up increasing).

 

Thanks,

 

M

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Maybe someone can help me here.

 

I am looking to buy a flat and would like to take out a mortgage.

 

The mortgage however I would like to pay back early so not have a time line associated with it.

 

Is there any mortgages like this here.

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We had such a mortgage but I forget what it was called. We were allowed to make an extra payment each year so reduced the loan from 10 yrs. to 8 something I think.

 

Don't know the current laws on this.

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I am thinking on whether to transfer my pounds across and get a small mortgage or whether to ride out the Brexit storm and get a higher mortgage.

 

I am not sure what is better financially.

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Did you get this question sorted RF? It sounds like you want to set up a fixed rate mortgage for 5 or 10 years with low Tilgung (small fixed repayments) which is easily affordable. Then you want a relatively high Sondertilgung... this allows you to pay up to a given %age of the original mortgage yearly as additional unplanned payments. It makes the fixed interest higher but if you pay off faster you should end up better off.

 

Essentially the fixed term mortgage is just used as a vehicle for paying off at your own pace. The downside would be that the higher the Sondertilgung, the higher the fixed interest rate... so if you're never able to make extra payments you just got a worse deal than you would have had without the Sondertilgung. Also, I don't know how high the special payments are allowed to be. Obviously if you set them at 10% per year, the fastest you could pay it all off would be 10 years (not accounting for the fixed rate you setup).

 

If you want less flexibility you could also consider just taking a 5 year fixed mortgage (great low interest rates available) with a low Tilgung which means you pay off hardly any of the borrowed amount. Then after the 5 years is up, you pay the remainder as a lump sum (assuming conditions have turned favorable by then).

The chances are that if you can get your money out of Britain within the next few years, you'll be able to invest it and get good returns while you're waiting for the 5 year fixed term to expire.

 

 

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I went to see a mortgage adviser last week.

 

The deal I got was 1.25% for a non flexible mortgage. You can only pay 5% of the property extra each year.

and 1.99% for a flexible mortgage where you can pay as much as you want.

 

I think I will go for the flexible one and when and if the pound recovers I can pay a chunk of the mortgage of.

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Hi All 

 

If i understood correctly, if you buy a property and let say fix the interest for 10 yrs. Before 10 yrs if you have to sell for any reasons, Bank will charge a closing fee.

Fee will generally depends if the interest rate have gone down as compared to the rates fixed at the start,

 

In case rates have gone up as compared to starting rate, then what happen, will Bank still charge any amount.

 

2, Until how many years the capital gains are not charged if you own the property. Is it 3 or 10 yrs of ownership.

 

3. Another question, I have a Work for Home contract, if I show one of the room as my work room and ask for tax benefits from Finanzamt, Does this have any impact when i sell.

   I think i read a post sometime back that if you use the house for work purpose the capital gains are charged if you sell if before 10 yrs or otherwise if i do not use for work purpose ( I mean if do not ask for tax benefits) , Capital gain clause if only applicable for first 3 yrs.

 

Thanks for your help in advance if you can answer my queries.

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