The mortgage exchange as an alternative to the loan termination
A house for eternity – unfortunately, this is not true for many property owners. Having to sell your own home or condominium for personal or professional reasons is certainly difficult, but sometimes it is necessary. Most new property is purchased, combined with the question: What happens to the previous construction financing? One option is the exchange, which we will introduce here.
What is a mortgage exchange?
The process has many names: collateral exchange or object exchange. What this means is that an existing security is replaced by a new one without changing the other framework conditions. In terms of real estate financing, this means that one mortgage will be replaced by another, while credit conditions will remain unchanged.
A mortgage exchange at the concrete example
The simplest way to explain such a mortgage exchange on a concrete example. The Yao family built a house five years ago and raised a real estate loan of over € 200,000. For the parents and the two-year-old son, the 100 square meter home is big enough. Also the garden offers enough space.
It would be tight with a second child. That’s why the landlord wants to nails with his head, as his wife becomes pregnant: sell the 100 square meters house and buy a new, 160 square meter detached house.
From a financing point of view, Mr.Yao now has several options. The homeowner can terminate the current real estate loan, must pay a prepayment penalty, and then complete a new mortgage lending.
Or he asks the financing bank if a mortgage exchange is possible. Then the land charge for the old property is deleted with the sale and instead a mortgage for the new house registered. In short: the pledge and thus the security for the bank is exchanged.
What advantages does a mortgage exchange offer?
Given the ongoing period of low interest rates and the ability to borrow very cheaply, it now appears to be much more attractive to terminate the current loan agreement. But the impression is deceptive. Because banks do not let their customers out of the contract.
They require a prepayment penalty. It covers the lost interest profits of credit institutions. Only after a term of ten years – plus a notice period of six months, the bottom line after 10.5 years – can a real estate loan be terminated without prepayment penalty.
The costs: prepayment penalty versus mortgage exchange
A universal formula, which financial advantage a loan against the prepayment penalty has, can not put up. There are too many factors to consider. Starting with the interest rates for the old and the new loan agreement to maturity and security.
The exchange is not a self-run
These numbers speak clearly for an exchange of objects. Ultimately, however, it always depends on the individual situation. Therefore, experts advise the bank to have both the prepayment fee calculated and to check a mortgage exchange.
However, there is no legal claim that the bank agrees to a swap of collateral. It is true that the Court of Justice ruled in a ruling that the borrower can offer a hedge and continue the loan accordingly. However, several prerequisites have to be met in advance (4) (5).
- The new property must cover the risk of the bank as well as the old property or house. In short, it must at least be equivalent collateral.
- The borrower must be willing and able to bear the costs associated with the security swap.
- The bank must not be disadvantaged in the management and exploitation of substitute security.
How does an exchange take place?
If the signs are green and the bank is ready for an exchange, two scenarios are conceivable.
- The sale of the old object takes place before the purchase of the new property.
- The new property is bought before or when the old property changes hands.
In the first variant, the builder and bank are on the safe side. The seller does not have to worry about finding a buyer, and the bank knows that they are getting their money. The purchase amount is transferred to a blocked account from which the new property is later paid.
The bank therefore has either the blocked account or the house as collateral. The only problem here: As long as you do not have a new roof over your head, rent must be paid or used by friends or parents.
Option two often requires interim financing. As a rule, the capital is not immediately available after a sale. Nevertheless, payments must already be made in connection with the purchase of the new property.
Ideally, the interim financing is agreed with the bank, where you have already completed the construction loan. To give just one example: BHW construction charges a fee of one percent of the loan amount. The bridging loan is then later easily repaid with the sales proceeds.
Conclusion: The exchange is worth considering
If you need to sell your house or condominium because a larger property is needed or because your job requires a move, you should at least consider a mortgage exchange. In many cases it is cheaper than the termination of the loan agreement.
Nevertheless, it is advisable to keep all options open and have the bank calculate both scenarios. Because it always depends on the individual case, which way is the better.