4 ms·

Is refinancing not a thing in Europe?

by smeeth 6y ago

guggle 6y ago
It is definitely a thing (saved a lot myself). But amazingly, not everyone knows about it.
machiaweliczny 6y ago
It's a thing. Not sure if whole EU but in Poland by law you don't pay fees when refinancing after 3 years.
joncrocks 6y ago
Not sure about the rest of the EU, but in the UK it's unusual to have very long-term mortgages that seems to be described here. The norm is 2->3 year variable rate (tracking an underlying rate + a %) or a 2->5 year fixed, maybe a 10 year fixed. After that they tend to 'default' to a worse rate for the remainder, but with no penalties generally for switching. Remortgaging is a normal part of life, but you can imagine that there might be penalty clauses if you've signed up for a 10 year fixed and in year 2/3 you want to remortgage at different terms.
- srtjstjsj 6y ago
  The US doesn't have the penalty fees, only transaction fees.
Xylakant 6y ago
At least in Germany, it's common to have a fixed interest rate for up to 30 years (more common are 10 and 20, 30 is rare). You can refinance, but you have to basically pay a fee that covers the expected loss for the bank, so that may not be worth it. Other countries differ, for example AFAIR it was common in Poland to have housing credits pegged to the swiss franc. However, I'm fairly certain that the GP is exaggerating. Even 15 years ago, no bank asked for 10%. 5% would have been a lot, something around 3.5 - 4% common. My parents paid between 7 and 10% when they built their house, but that's like at least 40 years now. Today, something around 2% is the going rate. At least in the booming markets, however, the rise in prices has completely eaten the gain in interest. I could for the same monthly installmend pretty much finance the same size as I could 10 years ago, the interest rate would be lower, but the principal substantially higher.
- analog31 6y ago
  That's interesting. In the US, it's called a "pre-payment penalty," where you have to pay a fee if you want to pay off a loan early. It's not imposed by regulation, but is up to each lender, so you can choose a loan that does not have such a penalty. Often consumers with weak credit or low incomes end up with loans that have worse terms, such as these penalties. My family refinanced our home loan, and it was just a matter of going to the bank and signing the paperwork that they filled out for us. It took less than an hour, and the ROI was not hard to compute.
  - saagarjha 6y ago
    Perhaps I don’t understand why there should be a penalty to pay off a loan too early? I’ve given the bank back their money; isn’t that exactly why I was paying interest in the first place?
    - pb7 6y ago
      They write the terms to benefit themselves; in this case, to guarantee a minimum payout from the effort/risk. Not justifying it but a bank does as a bank does.
    - ARandumGuy 6y ago
      Because paying off a loan early means that loan has had less time to generate interest, which means the bank gets less money. On an extreme example, imagine taking out a loan, then you pay it all back the next day. The loan has earned no interest, but the bank had to spend a bunch of time and money to get the loan set up. Of course, early payment penalties are still pretty scummy. However, it does make sense why a bank would have one.
      - names_are_hard 6y ago
        I don't know if they're scummy. When I buy a typical corporate bond I expect that the company will pay until maturity. If I buy a callable bond wouldn't I expect to be compensated for the one sided exposure to interest rate risk I'm exposing myself to (rates go up I lose, rates go down I lose)? With consumer debt we have different expectations of what's fair, but consider the bank's risk profile here - if interest rates go up those outstanding mortgages are taking them for a ride, and if they go down the customers refi... seems natural they'd want to minimize prepayments.

Is refinancing not a thing in Europe?

by smeeth 6y ago

Is refinancing not a thing in Europe?

guggle 6y ago

It is definitely a thing (saved a lot myself). But amazingly, not everyone knows about it.

machiaweliczny 6y ago

It's a thing. Not sure if whole EU but in Poland by law you don't pay fees when refinancing after 3 years.

joncrocks 6y ago

Not sure about the rest of the EU, but in the UK it's unusual to have very long-term mortgages that seems to be described here. The norm is 2->3 year variable rate (tracking an underlying rate + a %) or a 2->5 year fixed, maybe a 10 year fixed. After that they tend to 'default' to a worse rate for the remainder, but with no penalties generally for switching. Remortgaging is a normal part of life, but you can imagine that there might be penalty clauses if you've signed up for a 10 year fixed and in year 2/3 you want to remortgage at different terms.

srtjstjsj 6y ago
The US doesn't have the penalty fees, only transaction fees.

Xylakant 6y ago

At least in Germany, it's common to have a fixed interest rate for up to 30 years (more common are 10 and 20, 30 is rare). You can refinance, but you have to basically pay a fee that covers the expected loss for the bank, so that may not be worth it. Other countries differ, for example AFAIR it was common in Poland to have housing credits pegged to the swiss franc. However, I'm fairly certain that the GP is exaggerating. Even 15 years ago, no bank asked for 10%. 5% would have been a lot, something around 3.5 - 4% common. My parents paid between 7 and 10% when they built their house, but that's like at least 40 years now. Today, something around 2% is the going rate. At least in the booming markets, however, the rise in prices has completely eaten the gain in interest. I could for the same monthly installmend pretty much finance the same size as I could 10 years ago, the interest rate would be lower, but the principal substantially higher.

analog31 6y ago
That's interesting. In the US, it's called a "pre-payment penalty," where you have to pay a fee if you want to pay off a loan early. It's not imposed by regulation, but is up to each lender, so you can choose a loan that does not have such a penalty. Often consumers with weak credit or low incomes end up with loans that have worse terms, such as these penalties. My family refinanced our home loan, and it was just a matter of going to the bank and signing the paperwork that they filled out for us. It took less than an hour, and the ROI was not hard to compute.
- saagarjha 6y ago
  Perhaps I don’t understand why there should be a penalty to pay off a loan too early? I’ve given the bank back their money; isn’t that exactly why I was paying interest in the first place?
  - pb7 6y ago
    They write the terms to benefit themselves; in this case, to guarantee a minimum payout from the effort/risk. Not justifying it but a bank does as a bank does.
  - ARandumGuy 6y ago
    Because paying off a loan early means that loan has had less time to generate interest, which means the bank gets less money. On an extreme example, imagine taking out a loan, then you pay it all back the next day. The loan has earned no interest, but the bank had to spend a bunch of time and money to get the loan set up. Of course, early payment penalties are still pretty scummy. However, it does make sense why a bank would have one.
    - names_are_hard 6y ago
      I don't know if they're scummy. When I buy a typical corporate bond I expect that the company will pay until maturity. If I buy a callable bond wouldn't I expect to be compensated for the one sided exposure to interest rate risk I'm exposing myself to (rates go up I lose, rates go down I lose)? With consumer debt we have different expectations of what's fair, but consider the bank's risk profile here - if interest rates go up those outstanding mortgages are taking them for a ride, and if they go down the customers refi... seems natural they'd want to minimize prepayments.