Follow-up financing: How to set it up flexibly


Lerato Khumalo

The rising interest rates are causing some homeowners to sweat. This is what you need to know about follow-up financing.

The sunny times for property buyers are over for now. While construction interest rates were between one and two percent or even less just a few months ago, they have risen rapidly since the beginning of this year. For some, this has shattered the dream of owning a home, but it also has significant consequences for all those home builders who now have to worry about their follow-up financing.

Most building financing is initially concluded with a fixed interest rate for ten or 15 years. If this period expires, new negotiations must be held and a follow-up loan agreed. Owners who are now faced with this task are exposed to great imponderables.

“Nobody can say where things are headed,” says Annabel Oelmann, head of the Bremen Consumer Advice Center. Have we already reached the tip of the iceberg or will interest rates continue to rise? That is why it is difficult to give consumers general recommendations at this time.

“Every case is different, and every home builder should approach the matter individually,” advises Jan Schulze, financing specialist at Dr. Klein Baufinanzierung, a nationwide financial services provider. “The first step is to check your personal situation in the current phase of your life and then plan your budget accordingly.”

When the follow-up financing is provided, most people’s financial situation looks much better than it did shortly after the construction phase. Their earnings have increased in the meantime, and perhaps they have received inheritances and other income.

“But of course there are also cases where things have not gone so smoothly and there have even been losses in income,” says Oelmann. “In our consultations we are still seeing the effects of Corona, which are limiting family budgets because there are no secondary jobs or entire jobs have disappeared.” Added to this are the high energy prices, which are putting consumers under pressure.

The financing bank usually makes its customer an offer for follow-up financing around three months before the end of the fixed interest rate period. “But that is far too late to consider it for the first time,” says Oelmann. Customers should observe the market closely years in advance and obtain offers so that they have alternatives if they do not like the proposed conditions.

“Your own bank often doesn’t offer the best conditions,” says Jan Schulze. “The interest rate differences between the banks’ offers are quite large, currently they are between 0.4 and 0.8 percentage points,” says the expert. But you don’t necessarily have to switch. Some banks also accommodate their customers if they see that the offers from other banks are cheaper.

Many builders who have been paying off their loans for years want to keep the same amount they have paid so far when refinancing. “But with the increased interest rates, they are no longer getting the same for this amount,” Jan Schulze points out.

During the low interest rate phase, they were able to afford a relatively high repayment, meaning they could pay off the loan more quickly. Now they have to weigh up the question: can I still afford the high repayment, or do I have to make compromises and pay off the loan for longer because of the high interest rates?

“For many consumers, it is important that they create the conditions now to be able to finance their property safely until the end,” says Oelmann. “This clientele is interested in securing the current interest rates for as long as possible.” That is why longer-term contracts are often concluded.

Particularly security-oriented customers even opt for a forward loan before the end of the fixed interest rate period, which allows them to secure the current interest rate level for up to five years in advance for a small surcharge. “This can be worthwhile, but it can also be the wrong decision in retrospect,” says Jan Schulze.

On the other hand, there are also customers who are now opting for short-term contracts because they think things will change. “Nobody can say today who will do better in the end. It’s a bet on the future,” says Oelmann.

Regardless of which strategy the customer ultimately decides on, there is one unconditional recommendation: “It is important to keep the repayment as flexible as possible,” advises Klaus Kellhammer, head of the Tübingen regional office of the Association of Private Builders. “Customers should definitely agree on special repayments and repayment changes, even if this costs a small surcharge.” This is essential in order to remain able to act even in stormy times.