Loan refinancing: when does replacing an expensive loan pay off?
Replacing an expensive loan with a cheaper one saves interest, but you must watch the cost of settling it. Work out your new rate and compare it with your current one.
When does refinancing pay off?
Refinancing pays off when the new effective rate is far enough below the old one that the saving exceeds the cost of settlement, above all any early repayment charge. Mortgage-backed loans follow their own rules.
Non-binding guide using an annuity rate and a fixed interest rate. The actual offer depends on creditworthiness, amount and term; the effective rate in the offer is what counts.
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The maths behind refinancing
Compare outstanding balance and rate of the old loan with rate and total cost of the new one.
Enter the outstanding balance as the amount and the new rate from the offer, then set the interest cost over the remaining term against the old one.
Mind early repayment charges
On early settlement the lender may charge compensation, which is capped by law.
For fixed-rate mortgages it can be high. See prepayment penalty.
Combining several loans
Several rates can often be merged into one, lowering the monthly burden.
A longer term lowers the rate but raises total interest. Check whether a top-up of the mortgage is cheaper, see mortgage rates.
Frequently asked questions
What is refinancing?
An existing loan is replaced by a new one with better terms.
When is settlement free of charge?
It depends on the contract and loan type; for instalment loans the compensation is capped by law.
Does it affect my credit score?
Requests and new loans can enter the credit assessment. You see how it works with the lender before submitting.
Can I combine several loans?
Yes, often as a new loan equal to the sum of the balances.
Any questions on this topic?
A first consultation is free and without obligation — the commission is, as a rule, paid by the bank. We tell you what this means for your own financing.
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Editorially responsible: Olga Nikushkina — owner, §34i GewO (German mortgage brokerage), adviser register D-W-132-ZUCB-95. Specialised in German property financing with an international dimension: non-residents, foreign-currency income, cross-border workers, expats. Siegfried Perini is entered in the German intermediary register under this licence as a person directly involved in brokerage and advice (§ 11a GewO), active in real estate since 1992. Not legal or tax advice.