• With debt restructuring, you can save money as interest rates for loans have significantly decreased.
• Consolidate all ongoing loans into a new, cheaper loan.
• Keep in mind that your bank may charge an early repayment fee for restructuring your loan.
• Different rules apply for early repayment fees on installment loans and mortgage loans.

Interest rates for loans have significantly decreased in recent years, but due to the European Central Bank's interest rate hike, rates have already begun to rise. A few years ago, an installment loan of 10,000 euros with a 60-month term would have an average interest rate of around 4.6%. Currently, depending on creditworthiness, rates as low as below 4% are still possible. 

There is still potential for savings when restructuring a mortgage loan. Ten years ago, borrowers paid an average of 3.65% for a loan with a 10-year interest lock. Currently, the best possible rate is 3.40% (80% loan-to-value ratio, as of late September 2022).

With debt restructuring, you pay off the old loan after a certain period and secure financing at the current, lower rates. 

By restructuring, you save money on the unnecessarily high interest rate – the payment amount becomes lower, or you pay off the remaining debt more quickly with a shorter term while maintaining the same monthly payment. 

In a debt restructuring, you take out a new loan for the amount of the remaining balance on your current loan. 

The loan sum is used to pay off the old loans early. With restructuring, you only make one payment for the new financing and benefit from the better interest rate. 

However, there is a catch: since the banks lose interest income due to the early repayment of the loan, they are allowed to charge you a prepayment penalty. The amount of this penalty depends, among other factors, on the type of financing. 

Installment loans are loans that consumers take out without providing collateral. Auto loans also fall into this category, although the bank retains the vehicle title as collateral. Since the implementation of the EU Consumer Credit Directive, the following rules apply to loans taken out after June 11, 2010:

• For installment loans with a remaining term of twelve months or more, banks may charge a maximum of 1% of the remaining debt as a prepayment penalty.
• If the remaining term is less than twelve months, the prepayment penalty drops to 0.5%.

Different rules apply to mortgage loans when refinancing. In this case, the bank is still allowed to calculate the prepayment penalty. There are two methods to determine the penalty:

• Active-active method: The bank lends the money you have received early through your refinancing to a new customer. If the new customer pays lower interest rates than you did, the bank incurs a loss. You will need to compensate the bank for this loss.
• Active-passive method: This method is more common. The assumption is that the bank invests the early repayment money in securities. If these yield less interest than your original loan, the difference becomes the prepayment penalty.

Additionally, special repayment options, savings from reduced credit default risk, and lower administrative costs are considered in the calculation. If you are planning to refinance your mortgage, it is crucial to have the prepayment penalty calculations reviewed by a professional. The process is complex and prone to errors.

If the interest rate lock-in period (Zinsbindung) of a mortgage has not expired, you are obligated to compensate the bank for the loss of interest income when refinancing. 

If you have taken out a loan with an interest rate lock-in period or term of more than ten years, you may terminate the loan after ten years from the full disbursement of the loan, with a six-month notice period. In this case, no prepayment penalty will be charged. 

Mortgages with a variable interest rate can always be terminated with a three-month notice period and no prepayment penalty.

Whether refinancing a loan is worthwhile depends on several factors:

• Amount of remaining debt for the planned refinancing
• Remaining loan term
• Interest rate

Refinancing a personal loan is typically worthwhile if the remaining debt plus prepayment penalty exceeds 1,000 euros and the remaining term is over twelve months. Most banks offer loans with minimum amounts and terms that are higher.

If you have extensively used your overdraft, refinancing to a personal loan can be beneficial. This allows you to benefit from much lower interest rates and gradually reduce your debt in a controlled manner.

Due to the high prepayment penalty, it is often not worth refinancing a mortgage with an interest rate lock. In this case, it's important to calculate carefully. Another situation arises when the interest rate lock expires and you need a follow-up financing. You can either refinance the loan or use the extension option.

Extension means that the loan agreement continues with the current bank. Only the interest rate and the length of the interest rate lock are renegotiated. This is simple, as the bank sends an offer that you can accept with a signature. However, the interest rates are usually higher than with refinancing to a new loan. We would be happy to assess your options for you.