High Prepayment Rates: Bad Time To Exit Real Estate Loans

Many a borrower is annoyed that he has not waited a few more years to receive his real estate loan. Finally, the interest on real estate loans has fallen dramatically in recent years, construction money is very attractive and even larger financings can be saddled in conjunction with a manageable interest burden.

 

As a result of this development

As a result of this development

In the interest rate markets, some borrowers are thinking of prematurely withdrawing from their financing and, at the same time, closing new financing. The aim of such a change is to reduce the interest burden considerably. The interest in such a change is also so great because many people think he would be possible at very attractive conditions.

Variable loans bring two great benefits, which can be very attractive depending on the financing. First, there is the fact that, due to the lack of fixed interest, a quick exit is possible. The borrower does not bind himself long, which is useful, for example, when interim financing (eg waiting for disbursement of a legacy) is needed.

 

High prepayment penalty due to the interest rate market

High prepayment penalty due to the interest rate market

The withdrawal from a loan before expiry of the agreed fixed interest period is only possible with payment of a so-called prepayment penalty. This payment is due to the bank because it causes financial loss due to the early termination of financing. Borrowers often assume that the costs involved would not be very high because interest rates have fallen so much.

Unfortunately, the reality is completely different. Due to the fall in interest rates, the prepayment penalties have skyrocketed. If you exit now, you must pay a particularly high prepayment penalty. This is often so high that an exit is simply not worthwhile. The main reason for the high cost is quickly found. For him, it is the cheap market rates. Because banks can only repay the repaid loan amount at a low interest rate, there is a big difference between the lost interest payments and the income from the interest rate market.