Is paying off your mortgage early a good financial decision?
Anyone in Germany who buys a property and takes out a mortgage has the option of making an additional prepayment with the special repayment right (called Sondertilgung in German). By doing this, it's possible to finish paying off the mortgage faster. By making a prepayment on a real estate loan, you pay an unscheduled instalment into the loan account in addition to the regular instalments that are debited monthly. Prepayments are therefore made outside the instalments agreed in the loan contract. The amount of such an unscheduled payment is specified in the contract as a repayment plan with an extra prepayment. It is possible to make the prepayment once or regularly. However, there are typically pros and cons associated with prepaying a mortgage. Read on to find out more.
What are the benefits of making lump sum prepayments?
Making a prepayment on your mortgage gives you the chance to make additional contributions to paying off your loan each year. Making unscheduled repayments on an annuity loan has several advantages. For example, real estate buyers save interest because it is determined on the amount of your remaining debt. This decreases with each instalment paid, so that the interest burden decreases as well. Moreover, you reduce the term of the financing and are therefore debt-free more quickly. The lump sum payment on your mortgage also allows for more flexibility, as an unexpected positive development of your own financial situation can be taken into account directly. You can also use the extra repayment to pay off your mortgage early. A bank usually charges an early repayment fee for early redemption. A contractually agreed yearly lump sum repayment reduces the early repayment penalty, regardless of whether the unscheduled repayment has already been paid or is still being paid.
Is there a prepayment penalty?
Prepayment is not automatically included in every form of real estate financing, but it is offered by many banks and lenders. In most cases, it is possible to make a free unscheduled prepayment of five percent of the loan amount. If the bank or credit institution does not offer free prepayments on your mortgage, you can have a corresponding clause included in the contract. This is usually accompanied by a surcharge on the interest rate, which is usually up to 0.25 percent. Extended rights to a prepayments of up to ten per cent of the net loan amount are usually also accompanied by an interest rate surcharge.
Understanding prepayment charges
The conditions for mortgage prepayments are specified in the contract. Even if a free total prepayment is granted, this should be stipulated in the contract. Important agreements include the amount and the payment interval. For the latter, the annual prepayment can be made as a percentage of the loan amount or in the form of a lump sum to be paid into the loan during the term.
Arranging prepayments with your lender
You can theoretically get a repayment plan that allows for early repayments from any provider of a property loan. It is best to discuss your options with the lender before signing the contract, however. For example, not all programmes offer a KfW unscheduled repayment. Also, not every promotional loan will allow you to prepay your mortgage early without additional charges, or without a prepayment penalty. That being said, you can arrange to prepay your mortgage without incurring extra charges through the German programmes "Cooperative Shares" (Genossenschaftsanteile), "Energy-efficient Rehabilitation" (Energieeffizient sanieren), and "Energy-efficient Construction" (Energieeffizient bauen). With a prepayment fee, extra repayment is possible for the KfW programmes "Home Ownership Programme" (Wohneigentumsprogramm), "Renewable Energies Standard" (Erneuerbare Energien Standard), "Energy-efficient Rehabilitation - Supplementary Loan" (Energieeffizient sanieren - Ergänzungskreditand), and "Age-Appropriate Conversion" (Altersgerecht umbauen). You can also contractually agree on prepaying your mortgage with Sparkasse. Prepaying an Easycredit can also be done at any time, just like prepayments at Ing Diba.
Example of a prepayment
Prepaying an annuity loan makes it possible to pay off the remaining debt much faster, and thus reduce the total term of the mortgage. If, for example, you have a five percent prepayment free of charge for a loan amount of 100,000 euros with an APR of 2.41 percent, a fixed interest rate that extends over ten years and an initial repayment of one percent per year, you reduce the term from 50 years and nine months to 13 years and eight months. In addition, by prepaying the loan, the total interest is reduced from 22,084 euros to 15,703 euros. This illustrates the considerable advantages, both financially and in terms of time, that prepaying a mortgage offers.
Calculate mortgage prepayment and save money
Prepaying your loan is a sensible option if you want to get rid of your debt more quickly. It is helpful to calculate the prepayment in advance so that you can correctly estimate the savings potential. In order to achieve the highest possible advantage, it is best to clarify your options with your lender before agreeing on the contract. We will be happy to advise you and support you in your real estate financing with sound know-how and many years of experience. Contact us via the form below so you can find the real estate loan that suits you best.
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