What is debt restructuring?
Debt restructuring is a form of follow-up financing in which you replace your existing loan with a cheaper interest-bearing loan. A debt rescheduling can quickly pay off, especially when it comes to financing with long terms, such as construction finance. Because even small interest rate differences can have extrapolated cost-saving effects over years or decades. Several follow-up loans are usually necessary until a real estate loan is fully repaid.
In the course of the financing, the borrower is therefore offered several opportunities to secure a cheaper interest rate through rescheduling and thus reduce the overall financial burden on the mortgage lending. It is important that you check the current market and contract conditions in good time so that you can switch to a cheaper provider at the right time.
How much does it take to reschedule a mortgage?
Many builders miss out on the chance of more favorable financing terms because they overestimate the effort of rescheduling. Many of the documents to be submitted are already available through the initial application. So all you have to do is submit them to the new bank. Once the bank has checked all documents and granted a loan, the new loan agreement can be signed. The banks generally regulate the settlement of the loan among themselves.
What documents do I need for debt restructuring?
If you apply for the debt rescheduling of the real estate financing to a new bank, all documents must be submitted that were also necessary for the initial contract. Among other things, the following must be submitted:
- Documents on the income situation (proof of salary for the last 3 months)
- All documents relating to the property (floor plan, site plan, etc.)
- Current excerpt from the land register
- Current lender’s loan agreement
As a new loan agreement is concluded when the debt is rescheduled, the bank also carries out a credit check before the change.
When is rescheduling possible?
You have to take care of a follow-up loan at the latest when the interest rate fixation on your mortgage lapses and a residual debt is still outstanding. You now have the choice of concluding follow-up financing with your house bank (prolongation) or rescheduling to a bank with more favorable terms.
Debt restructuring is theoretically possible even while interest rates are still pending. In these cases, however, banks usually demand a prepayment penalty, which is often so high that it quickly nullifies the interest rate advantage of rescheduling. A debt rescheduling of the mortgage is therefore more sensible at the end of the fixed interest period.
Debt rescheduling depends on the time when the interest rate is fixed
When you have which options for debt rescheduling mainly depends on when your borrowing period ends. Let us make the following assumption: The current building rates are very cheap, but your rate lock will continue for a few months or years. So what can you do to ensure good interest rates? The remaining time until the end of the fixed interest rate is decisive:
- Your fixed interest rate ends in the next 12 months: Then you can either arrange a prolongation with your house bank or opt for debt rescheduling to a cheaper bank. Please note: If the debt is rescheduled early, the lender will ask for prepayment penalty. Talk to your bank.
- Your fixed interest rate still runs between 12 months and 5 years: Then you can secure a currently low building interest rate for the future by taking out a forward loan. This form of loan is the cheaper alternative to early debt restructuring.
- Your fixed interest rate will continue to run for more than 5 years: As a rule, early rescheduling does not make any sense at this time. Because even if your bank releases you from the loan agreement, the costs of the prepayment penalty would exceed the interest savings.
- Your fixed interest rate has been running for 10 years: Then you can terminate your loan contract with a notice period of 6 months and reschedule. The reason: no matter how long your fixed interest rate lasts, after 10 years you have the right to special termination by law (§489 BGB). It is important that you adhere to the six-month notice period.
You can find further helpful information on how to find the right time for your debt restructuring in our article on refinancing.
What are the costs of changing the bank?
When changing banks, fees apply that have to be taken into account. For example, the mortgage must be transferred from the old to the new bank. Fees for the notary and the land registry are charged for this, but generally do not amount to more than 0.3% of the loan amount. With a loan amount of $ 100,000, this is only $ 300. A debt rescheduling pays off if the interest advantage exceeds the costs incurred for the debt rescheduling.
As a rule of thumb, if the follow-up financing is 0.2% cheaper than your old financing, you have already offset the switching costs of the debt restructuring.
In the event of early rescheduling, prepayment penalty is due
A debt rescheduling does not only result in exchange costs. If you would like to reschedule your construction loan while the interest rate is still pending, your bank is not obliged to release you from the contract. If she does, she can demand a prepayment penalty. The reason: the debt escapes the bank’s planned interest income.
The bank calculates the amount of the compensation on the basis of the loan amount and the interest, which it will lose if the contract is canceled early until the end of the contract. The fee is therefore a kind of compensation for lost interest gains. How high this is depends on the outstanding debt, the remaining term, the agreed interest and the current interest level.
Is rescheduling worthwhile despite prepayment penalty?
In contrast to a conventional installment loan, the amount of compensation for building finance is not covered by law. It is entirely up to the bank to decide how high it should be. Depending on the amount, the prepayment fee can quickly cancel the interest rate advantage of a debt rescheduling. Therefore, ask your bank in advance how high the transfer costs actually are. Please note: Even if you reschedule your house bank, it can charge a prepayment fee for the change of contract.
Sample calculation: This is how expensive a prepayment penalty is
The following sample calculation shows how high the prepayment penalty for early debt restructuring is.
Assumption: You want to reschedule your building loan 2 years before the end of the fixed interest period. The remaining debt is $ 172,000. In this case, the bank will request a prepayment penalty of $ 12,689. In order for the early rescheduling to be worthwhile for you, the interest savings from the new loan agreement must at least exceed the costs for the prepayment penalty of $ 12,689. Added to this are the fees for the notary and land registry. The prepayment penalty consists of the following costs:
|Interest rate damage||$ 12,897|
|Saving of risk||– $ 315|
|Administration cost savings||– $ 93|
|Processing fee||+ $ 200|
|Prepayment penalty||$ 12,689|
You can use our prepayment penalty calculator to calculate how high the prepayment penalty for your remaining debt is.
Secure low interest rates in advance with a forward loan
If debt rescheduling does not pay off during the fixed interest rate due to the high prepayment penalty, you can also secure a favorable interest rate level with a forward loan for later. For later debt restructuring, the new bank will preserve the interest up to 5 years in advance. However, she also charges you a surcharge to secure the interest.
A forward loan therefore only pays off if the interest, including the forward premium, is cheaper than the interest on your current mortgage. You can find out how to calculate the forward premium in our guide on forward loans.
When is debt restructuring worthwhile?
A debt rescheduling is worthwhile if you save interest costs by changing the bank. As a rule of thumb, the higher the residual debt and the greater the difference between old and new interest, the more worthwhile a debt restructuring. The debt rescheduling of a loan is therefore particularly advisable in low interest rates. An example: In 2008, the interest level for a 10-year fixed interest rate was sometimes over 5%.
Anyone who concluded a building loan at these terms at that time can reschedule in 2018 with the current building rates for just over 1% (as of February 2018). The following example calculation shows how much savings potential can be in debt restructuring.
Sample calculation: This is how much you save with refinancing
Let us assume that in 2009 you completed construction financing with a term of 15 years at an interest rate of 5.2%. After 10 years, you exercise your right to special notice, since the interest rate level is now much lower than in 2009. So you compare current offers from other banks and decide to reschedule your remaining debt of $ 147,681 to a bank with an interest rate of 1.5%. The following graphic illustrates the interest rate advantage that comes from debt rescheduling:
Thanks to the interest rate differential of 3.7%, you have already saved $ 24,945 at the same high rate after the old rate fixation expired (in 2024) due to the lower interest rate. Since you secured the new interest for a term of 10 years after the special termination in 2019, you will save further interest costs in the next 5 years. It therefore makes sense to secure a favorable interest rate level for as long a period as possible in order to fully exploit the savings potential.
Invest interest advantage in repayment and benefit twice
You can also invest the interest savings gained through rescheduling in a higher repayment, so you benefit twice. How it works? You simply keep the monthly installment of the old contract and increase the repayment portion by the interest portion saved when the new contract is concluded. As a result, you not only pay less interest, but also shorten your term thanks to the faster repayment. So you are debt-free faster. The following sample calculation illustrates the saving principle:
|Prolongation||Debt restructuring without optimized repayment||Debt restructuring with optimized repayment|
|Loan amount||$ 80,450||$ 80,450||$ 80,450|
|Effective interest rate||1.82%||1.31%||1.31%|
|Fixed interest rate||15 years||15 years||15 years|
|Monthly Rate||$ 423||$ 390||$ 423|
|Remaining debt after 15 years||$ 18,065||$ 20,480||$ 13,817|
|Interest costs||$ 13,881||$ 10,142||$ 9,512|
The monthly charge remains the same for this calculation example with optimized repayment, but you save more than $ 4,300 in interest over the 15 years of fixed interest due to the lower interest rate and the investment in repayment. And the remaining debt is also lower in the end.
Check financial situation when rescheduling
Debt restructuring is a good time to check whether the monthly installment still fits your financial situation. If your situation has changed over time, you can take advantage of the hour and either raise or lower the rate. Debt restructuring also offers the chance to increase the loan amount, for example. This may be necessary if further unforeseen construction measures are pending.
The agreement of special payments can also be renegotiated when switching to a new bank. With debt rescheduling, you have the opportunity to improve your financial situation for the next fixed interest rate by changing the conditions.
Combine several loans through debt restructuring
Debt restructuring is not only an option for home loans, but basically for all types of loans that are repaid in installments. Whether installment, overdraft or car loan – you often pay off several loans at the same time with different terms and at different interest rates. Depending on the terms of the contract, it can therefore be worthwhile to combine such loans into one loan, especially in low interest rates. Example: Banks often charge very high interest rates for an overdraft facility, the costs of which can be significantly reduced through a debt rescheduling.
Another advantage: by aggregating the loans, you get a better overall view of your finances, since you only have to pay the bank a monthly installment. A installment loan comparison helps you to find a cheap transfer loan. Tip: In the course of debt restructuring, it is also possible to merge ongoing installment loans with a real estate loan.
The benefits of debt restructuring
- You secure cheaper interest for follow-up financing
- The interest savings can be used for a higher repayment
- If you invest the interest savings in the repayment, the loan term is shortened
- Due to the higher repayment, you are debt-free faster
- You can negotiate new conditions, e.g. for special repayments
The disadvantages of debt restructuring
- The change of bank is more time-consuming than the prolongation
- The new bank carries out a credit check
- In the event of early rescheduling, prepayment fees apply
- Fees for notary and land registry are charged
Debt restructuring step by step: How to proceed
- Check how high the residual debt is after your interest rate commitment expires: the higher the remaining debt, the more it is worth thinking about rescheduling the mortgage.
- Ask about the amount of the prepayment penalty for early rescheduling: Check the contract details of your loan or ask your house bank directly how high the compensation costs will be in the event of an early rescheduling.
- Get current offers: Use a comparison to get a market overview of current interest offers. If you also get an offer from your house bank, you can quickly see whether debt restructuring is actually worthwhile.
- Calculate interest savings and rescheduling costs: A rescheduling only makes sense for you if you effectively save interest costs by changing the bank. Therefore, you should add up all the costs that are incurred when rescheduling a debt and compare it with the interest savings. If the cost of the debt rescheduling exceeds the calculated savings, the change of provider is not worthwhile.
- Negotiate with your house bank: present the cheaper interest rate offer from your house bank: proceed with self-confidence. If your bank refuses to provide you with a similarly cheap offer, you should reschedule your mortgage loan.