The average term for mortgage lending is 35 years – however, the fixed interest rate often ends after five, ten or 15 years. Follow-up financing is necessary to finance the remaining debt of the loan. If the debtor opts for a bank change, ie debt restructuring, the loaned property is revalued.
Revaluation as a risk factor
Most borrowers are nervous about revaluing their property – and not least because of this, they decide against debt restructuring and to stay with the old bank. This nervousness is mostly unfounded!A reference point for the revaluation is the so-called mortgage lending: the lower the ratio between the mortgage lending value and the loan amount, the lower the risk that the property will have a poorer rating than the bank previously received.
As a guideline, 80 percent can be used here: if the loan maturity is below this, borrowers have no reason to fear a revaluation. The reason for this is simple: an appraisal or the revaluation of an object is always associated with (considerable) costs – an effort that must also be worthwhile for the lender. As a rule, borrowers can start from the original purchase price and also apply this in the loan application.
Can the reassessment be beneficial?
In fact, a new valuation report can also prove beneficial to the borrower. However, this presupposes that the value of the property has increased or the quality of living has improved. This can happen through measures taken by the client, ie modernizing or raising the level of the equipment, or through improvement of the local recreational opportunities or the infrastructure.
So if the property is valued higher by the new bank, the loan expiry and thus the risk of the bank is reduced. Advantage for the borrower: the lower the financial risk for the lender, the better conditions can usually be negotiated for follow-up financing.
Personal income situation and renewed credit check
The borrower’s income situation does not always remain unchanged: short-time work and, in particular, unemployment reduce the creditworthiness of the debtor in the eyes of the banks. If the old bank submits its extension offer shortly before the end of the fixed interest rate, it is advisable for borrowers with a poor credit rating to accept the offer: their creditworthiness is not checked again, whereas a credit check in the case of debt restructuring , ie a change of bank, would be mandatory, This advice also applies if the interest on the extension offer is a little higher than that of other competitors.
A changed income situation may mean that the borrower can no longer reliably pay the loan installments.
What happens then? The whole thing has no effect if it is simply a short-term weakness in creditworthiness: thanks to the Risk Limitation Act 4 of 2008. Previously, it was possible for banks to sell the mortgage loan to financial investors or to simply terminate it if the borrower had (short-term) payment difficulties.
The bank may only terminate the financing if at least two successive loan installments have not been serviced and the accumulated arrears amount to at least 2.5% of the loan amount. With a loan of USD 100,000 and a monthly installment of USD 500, this would mean termination with five arrears.
The revaluation of a property usually does not involve an increased risk and can even be worthwhile for the borrower if investments have been made in the expansion or in the increase in value of the property in recent years. If the debtor has to assume that his credit rating has deteriorated, the extension offer from the old bank should generally be accepted and a credit check avoided. Short-term payment difficulties remain without dramatic effects, especially if borrowers are in contact with their bank and do not simply tacitly stop paying in installments.