Fixed-rate loan

A fixed-term loan is a type of loan in which the borrower pays only interest throughout the entire term, and the entire principal amount is repaid in a single lump sum at the end of the term. Its structure is similar to that of a bullet mortgage and is used today primarily by investors, commercial real estate financiers, and for tax optimization purposes.

How a fixed-term loan works

With a fixed-term loan, the loan amount remains constant over the entire term-it is not reduced by monthly principal payments. This has the following consequences:

Monthly payment: Consists exclusively of the interest on the full loan principal. The payment is therefore lower initially than for an annuity loan of the same amount-but remains at this level permanently, whereas with an annuity loan, the interest burden decreases as principal is repaid.

Balloon payment: At the end of the agreed term (e.g., after 10, 15, or 20 years), the entire loan amount must be repaid in a single lump sum.

Repayment vehicle: To ensure the funds are available at the end of the term, the fixed-term loan is often combined with a repayment vehicle:

• Endowment life insurance
• Building savings contract
• Securities account / ETF savings plan
• Business income or sales proceeds

Total interest burden: Since the principal is never reduced, the total interest burden of a fixed-term loan over its term is significantly higher than that of an annuity loan.

Tax Benefits for Investors

For property landlords, the fixed-term loan is tax-advantageous:

• The loan interest is fully deductible as income-related expenses against rental income (§ 21 EStG)
• Since no principal is repaid, the deductible interest burden remains high over the entire term - with an annuity loan, it decreases as principal is repaid
• Combined with a whole life insurance policy, the fixed-rate loan can be used for optimized overall tax planning (consultation with a tax advisor recommended)

Fixed-Rate Loan vs. Annuity Loan: Calculation Example

To illustrate the difference, here is a simplified calculation example (loan amount: €300,000, interest rate: 3.5%, term: 15 years):

Key figure	Fixed-rate loan	Annuity loan (2% principal repayment)
Monthly payment	€875	€1,375
Total interest (15 years)	€157,500	approx. €104,000
Remaining debt after 15 years	€300,000	approx. €211,000
Tax-deductible p.a.	€10,500	€10,500 → decreasing

The fixed-rate loan provides a monthly liquidity advantage of €500 due to the lower payment-over 15 years, that amounts to €90,000 that can be invested elsewhere. At the same time, the total interest burden is approximately €53,500 higher. Tax deductibility remains at the maximum level with a fixed-rate loan, whereas it decreases with each repayment installment for an annuity loan.

This calculation example shows: A fixed-rate loan is only worthwhile if the repayment substitute is sufficiently profitable and the tax advantages more than offset the higher interest rates. This is not always the case.

Risks of a fixed-term loan: What borrowers need to know

A fixed-term loan carries several specific risks that must be carefully weighed when taking out the loan:

Refinancing risk: Upon maturity, the full loan amount must be repaid or refinanced. If interest rates have risen in the meantime, refinancing can be significantly more expensive than expected.

Risk of insufficient principal repayment: Endowment life insurance policies and fund savings plans may have a coverage gap at the end of the term-insurance returns are significantly lower today than in the 1990s, and fund portfolios are subject to price fluctuations.

Interest rate risk for variable-rate fixed-term loans: If the fixed-rate loan is taken out with a variable interest rate, rising interest rates can increase the monthly payment and fundamentally alter the risk profile.

Liquidity constraints: The capital in the repayment substitute (life insurance, investment account) is often not available at short notice-in the event of an unexpected liquidity requirement, high losses may result from early termination.

Practical Tip for Property Owners in Nuremberg and Franconia

In our investment advisory practice, we observe that fixed-rate loans are primarily used by experienced investors in Nuremberg who own multiple rental properties and wish to optimize their tax situation. It is generally not suitable for owner-occupiers or first-time investors, as the refinancing risk at the end of the term and the higher overall interest burden pose significant disadvantages.

We strongly recommend consulting a tax advisor specializing in real estate before taking out a fixed-rate loan-for example, from the network of the Nuremberg Chamber of Tax Advisors. Only those who understand their overall tax situation and have a realistic plan for repayment can make effective use of a fixed-rate loan. If needed, we can connect you with experienced financial advisors in the region who can provide an unbiased comparison of the various loan types.

Frequently Asked Questions

Who should take out a fixed-rate loan?

The fixed-rate loan is particularly suitable for landlords who want to maximize tax benefits through high interest deductions, and for commercial investors who have sufficient liquidity or repayment alternatives (life insurance, securities account proceeds) at the end of the term. It is not recommended for owner-occupiers without a clear repayment plan.

What happens if I cannot pay at the end of the fixed-rate loan term?

If an insufficient amount has been saved and no follow-up financing is possible, the property faces the risk of foreclosure. This risk must be realistically factored in when planning a fixed-rate loan. We recommend reviewing the repayment substitute for its coverage capacity at least every five years and taking corrective action early on if a coverage gap arises.

Can a fixed-rate loan be paid off early?

Yes, but generally only upon payment of an early repayment penalty, as the bank bases its calculations on fixed interest payments. With variable-rate fixed-term loans, the bank can often be repaid at the end of each interest rate adjustment period. For fixed-rate fixed-term loans, a notice period and an obligation to pay compensation apply in accordance with Section 490(2) of the German Civil Code (BGB).

Is a fixed-rate loan also suitable for purchasing condominiums as an investment?

Yes-in certain situations, a fixed-rate loan is attractive for purchasing rental condominiums, as the full interest expense is permanently deductible as income-related expenses. It is particularly suitable if the buyer has a high personal tax rate (42% or 45%) and the tax savings from the interest deductions are significant. Here, too, tax advisors and financial advisors should review the overall calculation in advance.

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