Annuity

Annuity - An annuity is the fixed annual payment on a loan, consisting of an interest portion and a principal portion. With an annuity loan-by far the most common form of real estate financing in Germany-the monthly payment remains constant throughout the entire fixed-rate period, while the ratio of interest to principal shifts with each payment in favor of principal repayment.

How an annuity loan works

With an annuity loan, a fixed interest rate and an initial principal payment are agreed upon at the start of the term. Since interest is always calculated on the current outstanding balance, the interest portion decreases with each principal payment made. The amount freed up goes toward principal repayment, so that the principal portion increases over time-while the total monthly payment remains the same.

Calculation example: For a loan of 300,000 euros with a 3.5 percent interest rate and a 2 percent initial principal repayment, the monthly annuity payment is 1,375 euros. In the first month, approximately 875 euros go toward interest and 500 euros toward principal. After ten years, the principal portion is already around 670 euros per month, while the interest portion has dropped to about 705 euros.

The fixed-rate period refers to the time frame for which the interest rate is fixed-usually 10, 15, or 20 years. Once the fixed-rate period expires, the remaining debt must be refinanced at the prevailing market interest rates (follow-up financing), provided the loan has not been fully repaid.

Impact of the Repayment Amount on Total Costs

The choice of the initial repayment amount has a significant impact on the total term and the total interest cost of the loan:

Initial Repayment	Term (€300,000 / 3.5% interest)	Remaining Debt after 10 Years	Total Interest Cost
1%	> 40 years	approx. €261,000	> €150,000
2%	approx. 30 years	approx. €228,000	approx. €110,000
3%	approx. 23 years	approx. €195,000	approx. €80,000
5%	approx. 16 years	approx. €135,000	approx. €50,000

A higher initial principal repayment significantly shortens the loan term and substantially reduces the total interest paid. For a loan amount of €300,000 and an interest rate of 3.5%, the difference between 1% and 3% initial principal repayment amounts to more than €70,000 in interest costs over the entire term.

Repayment Flexibility and Extra Payments

Many banks offer options to adjust the annuity payment during the fixed-rate period:

• Repayment rate adjustment: One-time or multiple adjustments to the repayment rate during the term (e.g., following a salary increase or the birth of a child), typically possible once per year
• Extra payments: Unscheduled repayment installments, usually 5-10% of the original loan amount annually, often free of charge. For a €300,000 loan, this amounts to up to €30,000 per year
• Repayment suspension: Some banks allow for a temporary suspension of principal payments in the event of financial hardship-interest continues to accrue

Repayment flexibility is particularly relevant when financing investment properties in Nuremberg: Investors who deduct the interest portion as business expenses for tax purposes can benefit from an adjusted repayment schedule-higher interest means more deductible expenses, while higher principal payments mean faster debt reduction.

Annuity in Follow-On Financing (Forward Loan)

Those who know that their fixed-rate period will expire in the coming years can secure the terms of their follow-on financing today with a forward loan-up to five years before the fixed-rate period expires. The interest rate is slightly higher than the current level (forward premium), but it offers planning security. A forward loan is particularly attractive during periods of rising interest rates, but tends to be disadvantageous during periods of low interest rates.

Practical Tip for Nuremberg and the Metropolitan Region

Given current real estate prices in the Nuremberg metropolitan region, we recommend an initial repayment of at least 2 to 3 percent to substantially reduce the remaining debt by the end of the fixed-rate period and limit the interest rate risk associated with refinancing. For a typical Nuremberg apartment building with a purchase price of 600,000 euros and 20% equity, this results in a loan of 480,000 euros-here, the choice between 1% and 3% principal repayment over the entire term makes a difference of over 100,000 euros in total interest.

Especially for investors purchasing apartments in neighborhoods such as Gostenhof, Maxfeld, or Schweinau for rental purposes, the choice between higher principal repayment and tax-deductible interest is a key optimization lever. Depending on the marginal tax rate, lower principal repayment may be advantageous because the higher interest payments are tax-deductible and improve the net result.

Frequently Asked Questions

What happens after the fixed-rate period ends?

After the fixed-rate period expires, the remaining principal must be refinanced at the market interest rates in effect at that time. The borrower can accept a follow-up offer from their current bank or switch to another lender (refinancing). If the interest rate for the follow-up financing is higher than that of the initial financing, the monthly payment increases while the principal repayment remains the same-or the principal repayment decreases while the monthly payment remains the same, which extends the total term. Interest rate risk is a key risk in real estate financing and should be mitigated through sufficient principal repayment during the initial fixed-rate period. Those who reduce the remaining debt to less than 50% of the original purchase price after ten years are significantly less vulnerable to interest rate increases when refinancing.

Is an annuity loan better than an amortization loan?

With an annuity loan, the monthly payment remains constant, whereas with an amortization loan (also known as a repayment loan), the payment is higher at the start and decreases with each payment-because the principal repayment remains the same and the interest portion decreases. The annuity loan offers greater planning security, while the amortization loan results in slightly lower total interest costs for the same loan amount because the principal repayment portion is higher from the start and the remaining debt decreases more quickly. In practice, annuity loans are used almost exclusively for real estate financing in Germany-banks prefer them due to their simpler handling and the constant installment amount, which simplifies the creditworthiness check.

Can I claim the annuity as a tax deduction?

For rented properties, the interest portion of the annuity can be claimed as a tax deduction for income from renting and leasing (§ 21 EStG). The principal portion, however, is not deductible, as it represents the repayment of borrowed capital. For investors with a high marginal tax rate (42% or 45%), this means: With €10,000 in annual interest expenses, the landlord saves €4,200-€4,500 in taxes. For owner-occupied residential property, neither interest nor principal payments are tax-deductible-with the exception of Wohn-Riester contracts under the Home Ownership Pension Act, where principal payments are subsidized up to certain maximum limits.

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