faq
What is the most popular form of credit in Germany? And what actually happens to the loan if the installment cannot be paid in a month? An overview.
Banks make it possible for people to buy their own home in their 20s or 30s. Without a loan, they might not have saved up the necessary purchase amount until they were 50 or 60 years old. But a real estate loan has its pitfalls. Which terms should be familiar and what should you pay attention to when negotiating with the bank?
Podcast “Gold & Ash: House Purchase Project”
In the first season of “Gold & Asche” the ARD financial editorial team The most important things when buying a house are examined step by step in seven episodes – with background information and expert knowledge. You can hear it in the ARD audio library and wherever podcasts are available. The individual episodes You will find here.
Episode 1: Is it worth buying a house? (21st of February)
Episode 2: The Right Time to Buy a Home (February 21)
Episode 3: How much house can I afford? (February 28)
Episode 4: What do I have to pay attention to when getting a loan? (6th March)
Episode 5: How the state provides financial support for buying a house (March 13)
Episode 6: Everything about energy renovation (March 20)
Episode 7: Was everything better before? (27th of March)
Which type of loan is appropriate for buying a property?
Loans that are due when purchasing a property are called mortgage loans. The form that is usually used is the so-called annuity loan. An annuity loan initially simply means that the amount that the home buyer pays to the bank every month remains the same until the end of the term. For example, the rate can remain unchanged at 1,000 euros month after month over ten years.
What is the monthly loan installment made up of?
What you don’t see at first glance is the composition of the monthly loan payment. It consists of two parts: the interest payment – i.e. the amount the bank receives for providing the loan amount – and part of the repayment. This is the amount that is actually used to pay off the loan, i.e. to repay it. The same rate, for example 1,000 euros, is transferred to the bank every month; but the proportionate composition of interest and repayment changes after the first payment.
The interest for the bank always accrues on the remaining loan amount. But after the first payment, this amount is reduced, as the other part of the monthly amount reduces the total loan amount. In the following month, the total loan amount decreased accordingly. Therefore, the bank receives slightly less interest.
With an annuity loan, the interest rate agreed with the bank remains the same throughout the entire term; only the repayment rate changes. And the more payments are made, the higher the repayment portion of the 1,000 euros is. Overall, the faster the loan is to be repaid, the higher the monthly burden will be. However, if you want to reduce your monthly loan payments, it will take longer to repay the loan – and this also increases the overall interest burden.
What is the fixed interest rate?
Fixed interest rate means that the interest rate is fixed for a certain period of time and does not change during this period. With an interest rate fixation of fifteen years, this would mean the same interest rate for the mortgage loan – regardless of whether market interest rates rise or fall. Anyone who takes out a loan primarily wants to protect themselves from suddenly rising interest rates for as long as possible. After the fixed interest rate expires, it is possible to agree a new one with the bank, as the loan is often not paid off during the agreed term.
Can you get out of fixed interest rates?
But what if the interest rate was fixed for 15 years and building interest rates on the market fall after just eight years? There is good and bad news: In Germany, loans with a fixed interest rate can be canceled after ten years with a lead time of six months. This means that in this case you have to pay a theoretically higher interest rate for two years. After ten years, the loan with worse interest rates can be canceled and renegotiated with the bank.
Niels Nauhauser from the Baden-Württemberg Consumer Center advises in the podcast “Gold & Asche: Project House Purchase”. ARD financial editorial team to pay attention to how quickly you can pay off the loan. “And then to think about what would happen in ten or 15 years if interest rates increased? Can I still finance this?” After all, you don’t know where interest rates will go.
“If you sleep better with peace of mind for 20 years and no longer have to go to the bank, then agree on a 20-year fixed interest rate.” Anyone who agrees on such a longer fixed interest rate can better calculate how high the monthly burden will be in the next few years. The disadvantage, however, is that a long fixed interest rate comes at a price because the interest rate is slightly higher.
However, anyone who decides on a short-term interest rate fixation must be aware that the monthly burden can increase significantly due to higher interest rates after the interest rate fixation period expires – namely if the loan interest rates have risen during the interest rate fixation period of the loan. It may therefore be worthwhile to use different terms to calculate what would happen to the follow-up financing if the interest rate rises or falls after the fixed interest rate.
Can you cancel a loan before the end of the loan term?
If you want to repay your loan early, you usually have to pay the bank a fee, the so-called prepayment penalty. This is paid to the bank as compensation for the lost interest income that the institution was expecting. The risk that the borrower might no longer be able to service the mortgage loan at some point disappears. The reason for the early repayment penalty lies in the bank’s long-term planning.
In order to offer the entire loan amount at a certain interest rate, it has to borrow the money itself on the capital market under certain conditions – as a rule, this means that the terms match. The unwieldy term is based on the assumption that the mortgage and the money loaned by the bank on the capital market have a similar term. So if the bank has loaned the money at a higher interest rate and the home buyer makes an unplanned special repayment, this could result in a loss for the bank.
Can you also make “extra payments” during the term?
In order to give yourself more flexibility and leeway during the term of the loan, regardless of the ten-year period, there is the option of making special repayments. This gives the borrower the opportunity to repay additional amounts in addition to the regular monthly installments – i.e. to pay off the loan more quickly.
This makes particular sense if you have received a larger sum of money during the loan term – for example through an inheritance or a large tax refund. A special repayment helps to reduce the remaining debt more quickly and reduce the interest burden.
However, such special repayments cannot be made as often as you like: special repayments are usually only possible once a year and only in a certain amount. This special repayment right must be written into the loan agreement because it is not included as standard in every loan agreement. And unfortunately nothing comes for free: as a borrower you sometimes pay higher fees or receive worse interest rates.
Can the repayment rate be changed during the term?
This possibility exists. This means you can pay off your bank debts either faster or slower. However, this must be contractually agreed with the bank. This could mean, for example, that you can change the repayment rate three times within the fixed interest rate period of ten years. However, there are often limitations to how much you can increase or decrease them.
If you lose your job or become ill: can payments be interrupted?
In such a case, you should first contact your bank. Then, for example, payments can be suspended – but that doesn’t mean that they will be canceled completely. They simply have to be made up at a later date. The loan agreement with the bank regulates how long you can suspend your installments, and of course this is not possible indefinitely. In addition, the term could be adjusted to reduce the monthly load. However, the interest rate usually remains the same. Insurance such as term life insurance can also help protect against unforeseen events.
How many banks should you talk to?
Alrun Jappe from the consumer magazine Finanztest recommends speaking to at least three banks before signing a contract and obtaining loan offers. It is advisable to contact at least one credit broker, as they have an overview of various offers, she says in the podcast. You should also ask your bank at least once. “It is advisable to contact three different providers, and very important: go in with the same basic data. So what loan amount, what term, what interest rate commitment. Only then are the offers really comparable,” says the expert.