When Refinancing a Mortgage Actually Pays: France, Germany, Italy

The saving is the gap times the interest you have not paid yet

An amortising loan front-loads interest by construction. The payment is constant, but its split moves: in the first year almost all of it is interest, in the last year almost all of it is capital. That is not a bank's design choice, it is what happens when you charge a fixed rate on a shrinking balance. The consequence for refinancing is direct and unintuitive — the amount you can save is not proportional to how long the loan has left, it is proportional to the interest still buried in the remaining payments, and that quantity falls much faster than the term does.

The concrete version, computed on one loan. A loan of EUR 250,000 over 20 years at 3.90% nominal has a monthly payment of EUR 1,501.81. Cut the rate by 0.80 points at various moments and keep the remaining term unchanged, and the total saving is EUR 20,307 if you act after two years, EUR 14,455 after five, EUR 9,487 after eight, EUR 5,477 after eleven, EUR 2,504 after fourteen and EUR 650 after seventeen. Same borrower, same loan, same rate cut; the only variable is when. Anyone quoting a fixed rate-gap threshold as a rule of thumb is quoting a number that is right at one point in the loan's life and wrong everywhere else.

France: two different operations with two different cost structures

Renegotiating with your existing lender and refinancing with a new one look similar and are legally not the same act. In a renegotiation the loan continues under an amendment: no early repayment takes place, so no early repayment indemnity can be charged, and the cost is an amendment fee plus, in some cases, a rewritten guarantee. In a refinancing the old loan is repaid in full by the new lender, which is an early repayment, and Article L313-47 of the Code de la consommation both grants the borrower that right at any time and allows a capped indemnity for the interest not earned.

The ceiling is in Article R313-25 and it is a double one: the indemnity may not exceed the value of six months' interest on the capital repaid at the loan's average rate, and it may not exceed 3% of the capital outstanding before the repayment. Both limits apply, so the borrower pays the lower of the two — and which one binds depends on the rate. At 3.90%, six months' interest is 1.95% of the balance, comfortably under the 3% cap; on the example above that is EUR 3,786.59 against a 3% figure of EUR 5,825.52. At a rate above 6%, the 3% cap becomes the binding one. Article L313-48 then removes the indemnity altogether where the early repayment follows the sale of the property because of a change of workplace, a death, or a forced cessation of professional activity of the borrower or the borrower's spouse, and Article L313-49 forbids charging anything else on top.

Germany: a clock rather than a cap, and a mortgage penalty that is not capped at all

German fixed-rate mortgages are not terminable at will, and this is the first thing to internalise: within the fixed-rate period the borrower has no ordinary right to repay early, so the question "what would the penalty be" often does not arise because there is no exit to price. What section 489 of the Civil Code gives instead is an unconditional right that arrives on a date. For a loan with a fixed borrowing rate, the borrower may terminate in whole or in part after ten years from full disbursement, on six months' notice — and section 489(4) states that this right cannot be excluded or made harder by contract. A twenty-year fixed rate is therefore, in practice, a ten-and-a-half-year commitment with the borrower holding an option after that.

Before that date, an exit generally requires the lender's agreement or a legitimate interest such as a sale, and it carries a Vorfälligkeitsentschädigung. Here is the point most summaries get wrong: the percentage ceilings in section 502(3) — 1% of the amount repaid early, or 0.5% where less than a year remains — are written for general consumer credit agreements, not for residential mortgage agreements. For a mortgage the lender may claim its appropriate loss directly connected with the early repayment, computed on a reinvestment basis, and on a large balance in a falling-rate environment that figure can be many times 1%. Section 502(2) does hand the borrower a real defence: the claim is excluded where the contract's information on duration, termination rights, or the method of calculating the compensation is insufficient, which is a documented ground that has repaid a great many borrowers who read their contract carefully.

Italy: the surrogazione is free by statute, which changes the whole calculation

Article 120-quater of the Consolidated Banking Act governs subrogation in financing contracts and it is written to remove friction rather than to price it. Any agreement, including one made after the contract, that prevents the debtor from exercising the right of subrogation or makes it costly is void. The subrogated lender steps into the existing security, personal and real, so the mortgage registration is preserved rather than cancelled and recreated. The operation must be completed within thirty working days from the moment the client asks the incoming lender to obtain the exact residual debt from the original one. And Article 7 of Law 40/2007 independently voids early repayment penalties for individuals on loans taken to buy or renovate residential property or premises for their own economic or professional activity, for contracts made from the entry into force of the decree on 2 February 2007.

When the operation is free, the break-even collapses to zero and the only question left is whether the new rate is lower — any gap at all, however small, pays from the first month. That is a genuinely different decision from the French or German one, and it is why refinancing behaviour in Italy responds to small rate movements that would not be worth the paperwork elsewhere. The limits are worth knowing too: a subrogation transfers the residual debt, it does not lend you more, so it is not the route for releasing equity or consolidating other credit. That requires a new loan, with its own costs, its own valuation and its own registration — a different operation with a different arithmetic.

Three numbers, in this order

Start with the remaining term, because it caps everything else. Under about seven years left, even a full point of gap on a mid-sized balance rarely covers a full refinancing package, and the honest answer is usually to do nothing. Then take the gap between your rate and the rate you can actually obtain today, quoted on the same term — not a headline rate for a new borrower with a different profile. Then get the total cost in writing, all of it: indemnity where one is due, arrangement fee, guarantee or mortgage registration, broker fee, and any insurance the new offer requires. Divide that total by the monthly saving and you have the break-even in months. Compare it to how long you actually expect to keep the loan, which for most people is shorter than the contract says.

One trap deserves its own sentence: extending the term. A new offer at a lower rate over a longer period will always show a smaller monthly payment, and it will often cost more in total than the loan you are leaving. If the new proposal lengthens the schedule, compute the total remaining cost on both sides rather than comparing monthly payments, because the monthly payment is the number the seller controls and the total is the number you pay. Lengthening the term is a legitimate choice when cash flow is the constraint — but then say so out loud, and stop calling it a saving.

Frequently asked questions

Is a one-point rate gap the right rule of thumb?

It is a rule of thumb that ignores the only variable that matters. On the loan computed above, a 0.80-point cut is worth EUR 20,307 after two years and EUR 650 after seventeen — a factor of thirty on the same gap. A gap of 0.30 points taken after six years is worth EUR 4,808 on that loan, which comfortably beats a full point taken in the final years. Replace the rule with a division: total cost of the operation, divided by the monthly saving, gives you the break-even in months, and that number is the one to compare against how long you will keep the loan.

France: is it cheaper to renegotiate with my own bank than to move?

Usually yes on cost, and usually worse on rate, which is why the two are worth putting side by side. A renegotiation is an amendment to the existing contract: no early repayment happens, so no indemnity is due, and the fee is typically modest — which on the example above means break-even in about thirteen months at a EUR 1,000 fee. A move to a new lender carries the indemnity, capped by Article R313-25, plus arrangement and guarantee costs, but it is negotiated against a competitor's offer rather than against your own bank's willingness to lose margin voluntarily. The practical sequence is to obtain a firm competing offer first and then present it, because a renegotiation without a written alternative is a request rather than a negotiation.

Germany: I am eight years into a fifteen-year fixed rate. Can I get out?

Not yet under the ordinary right, but soon and on a known date. Section 489 of the Civil Code lets you terminate ten years after the loan was fully disbursed, with six months' notice, and that right cannot be excluded by the contract — so in your case the notice can be given during the tenth year and the loan ends six months later. Before then, an exit needs the lender's agreement or a legitimate interest such as selling the property, and it carries compensation that is not subject to the 1% ceiling written for general consumer credit. If the ten-year date is within reach and rates are attractive now, the instrument to look at is a forward arrangement that fixes today's rate for a disbursement on that future date, priced with a premium for the waiting period.

Italy: does a surroga really cost nothing, including the notary?

That is what Article 120-quater of the Consolidated Banking Act is designed to deliver: any agreement that prevents the exercise of the right of subrogation or makes it costly for the debtor is void, whenever it was made. The incoming lender steps into the existing personal and real security, so the mortgage is not cancelled and re-registered, and the deed costs are not borne by the borrower. The completion window is thirty working days from the moment the client asks the incoming lender to obtain the exact residual debt from the original one. What is not covered is anything that goes beyond substituting the residual debt — a larger amount, a different property, additional credit — because that is a new loan and not a subrogation, and it carries the ordinary costs of one.

The new offer lowers my payment but adds four years. Is that a saving?

It is a cash-flow improvement and, in almost every case, a higher total cost. Interest accrues on the outstanding balance for as long as the balance exists, so four more years of it will usually more than swallow the benefit of a lower rate. The way to see it clearly is to compute the total of all remaining payments under each option and compare those two numbers, which is the comparison the monthly payment is designed to hide. Extending is a defensible decision if the payment is genuinely straining the household — but call it what it is, and if you take it, consider whether the new contract lets you overpay without charge so you can shorten it again when circumstances allow.