Repaying a mortgage: what you need to know
Sooner or later, a mortgage will reach its term and must be refinanced. You have two options: you can either extend it or repay it. In this article, we’ll explain what to watch out for if you choose to repay your mortgage.
Repayment is when you cancel the loan from your previous bank and take out a mortgage with another bank. Many credit agreements are subject to notice periods of three or six months. A new mortgage can sometimes even be negotiated 12 months in advance. That’s why it’s worth looking into follow-up financing at an early stage.
Is repaying my mortgage the right solution for me?
Repaying a mortgage has many advantages, especially from a financial perspective:
- You can benefit from better interest rates by playing the market. If you request quotes from several different providers, you will usually get more favorable offers. It pays to compare and negotiate.
- Avoid accepting advertised prices. The interest rates in the initial, non-negotiated guide offers displayed in bank windows are often 0.4% or even 0.5% higher than the interest rates of the best offers on the market. For a 10-year fixed-rate mortgage for 600,000 francs, for example, you could save up to 30,000 francs in interest.
- Even if you decide to extend your mortgage with your current bank before it reaches its term, you will need to renegotiate the interest rate conditions.
- Repaying a mortgage is easier than you think, because the financing requirements are the same for most banks.
Even though there are many advantages to repayment, it’s bound to involve more effort than simply extending the mortgage with your previous bank. When you extend a mortgage, most of the documents relating to the property, such as the sales documentation, are already available. In addition, hardly any expenses or processing fees are incurred for an extension.
Our main tip: If you want to repay your mortgage, you will need to be proactive. Take note of the term of your mortgage and allow a window of 12 months to find the follow-up solution that’s right for you. Make sure you don’t miss the notice period – it’s usually three or six months.
What else do you need to consider when repaying a mortgage?
Early follow-up financing
If your mortgage will reach its term in between six and twelve months’ time, you have the option of taking out follow-up financing with another provider right away, provided that you observe the notice period. Early conclusion of financing in this way is referred to as a forward mortgage. This option is particularly worthwhile if interest rates are expected to rise and you want to lock in the current low-interest conditions. Find out about any applicable forward mortgage surcharges that most banks charge in these circumstances.
Fees for early cancellation
Different conditions apply depending on the type of mortgage. Fixed-rate mortgages can only be canceled before the term if you pay an early redemption penalty. This makes it worth waiting for the term. Other types of mortgage, such as variable mortgages, can also only be repaid early for a fee. As well as factoring in the notice period and the term, you should find out about any other fees that may apply when switching your mortgage to another bank, and take these costs into account before you make your decision.
If you’ve taken out multiple mortgage tranches with different terms, switching providers often proves more difficult. The conditions for repaying a single mortgage tranche are usually less attractive. In this case, it’s worth investigating early repayment or, alternatively, early follow-up financing (if the mortgage terms are no more than 12 months apart), and repaying the entire mortgage. Compare the early redemption penalty and any forward mortgage surcharges with the interest payments you will save by switching. If the full financing amount is replaced by another bank within one to two years, it has become established practice in the industry to enable customers to switch without any major obstacles. This allows the mortgage to be “shared” until the final repayment.