Seldom has it been so cheap for home builders in Germany to finance the dream of their own four walls. A real estate loan with a ten-year fixed interest rate is currently available for 0.76 percent a year, according to data from the loan broker Interhyp. Thirty years ago, a real estate loan still cost a whopping 11.8 percent interest per year. This is why many home builders think they are also much more likely to be debt free than previous generations. A fallacy – at least when the buyers are looking for the lowest possible monthly payments and therefore neglect the repayment. Because as absurd as it sounds, repaying a loan often takes considerably longer with low interest rates.
Experts call this phenomenon the amortization paradox. It occurs especially with annuity loans, the most popular form of home finance in this country. Reason: With an annuity loan, the borrower pays the bank a fixed monthly rate over the entire term. It is made up of repayment and interest. If the interest rate level is low, this monthly installment is low – but the monthly repayment also if home builders do not actively counteract this. Anyone who finances a house or apartment should therefore never only look at the amount of the loan interest, but also at the repayment. “Basically, the higher the initial repayment, the shorter the term and the faster the borrower is debt-free,” says Dennis Bettenbrock, specialist in mortgage lending at the financial services provider Dr. Small in Düsseldorf.
Special repayments make sense
With low building interest rates, it is advisable to repay as much as possible – but at least two percent, advises the expert. Because the interest that the borrower has to pay for the loan also decreases with the term. With a building loan of 140,000 euros and a repayment rate of two percent, the home builder pays around 455 euros per month. This means that it takes around 35 years for the loan to be paid off. With three percent repayment, there are only 25 years left with a monthly installment of 571 euros. If, on the other hand, the borrower only repays one percent, he pays only half, but it also takes twice as long to pay off his loan. A high repayment rate has another advantage: “Some institutions reward borrowers who strive to repay the loan quickly,” explains Bettenbrock. You get the loan on better terms, which can add up to a few thousand euros.
In addition to the scheduled repayments, borrowers can usually also make so-called special repayments. With the option of extra payments, borrowers reserve the right to bring unexpected income such as inheritances to repay debt as soon as possible. The right to unscheduled payments is now standard at most banks. However, the design of the special repayment is still very different: Some financial institutions offer this option free of charge, while others charge a surcharge on the interest.
As a rule, the special repayment is a profitable business, calculations by Dr. Klein: Accordingly, annual special repayments of 2,000 euros reduce the remaining debt on a building loan of 72,000 by more than half after ten years. The term of the loan is reduced by eight years. Even if borrowers have to pay 0.25 percent more interest per year for the right to special repayment, according to the bill, they save over 12,000 euros in interest through the special payments.
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