Fixed-rate mortgage

Fixed-rate mortgage refers to a real estate loan in which the interest rate remains fixed and unchanged for the entire agreed term. The term is used far more frequently in Switzerland than in Germany, where the corresponding type of loan is referred to as a fixed-rate annuity loan. The basic principle is identical: planning security through a guaranteed interest rate over the agreed fixed-rate period.

Features and How It Works

The fixed-rate mortgage is characterized by the following features:

Constant interest rate: The interest rate agreed upon at the time of signing remains unchanged for the entire fixed-rate period-regardless of how the market (EURIBOR, ECB key interest rate) develops.

Fixed-rate period: Common terms in Germany: 5, 10, 15, 20, 25, or 30 years. Longer fixed-rate periods offer greater planning security but are generally somewhat more expensive (higher interest rate) than shorter ones.

Repayment: With the German variant (annuity loan), a fixed amount is paid monthly that includes both interest and principal. As the principal repayment increases over time, the interest burden decreases and the principal repayment increases.

No interest rate adjustment: If market interest rates rise, the borrower benefits. If they fall, the borrower has no immediate advantage-but could exit the loan after 10 years via a special termination clause (§ 489 BGB).

Fixed-rate period	Advantage	Disadvantage
Short (5 years)	Lower initial interest rate	Interest rate risk upon refinancing
Medium (10-15 years)	Good compromise	Moderate interest rate
Long (20-30 years)	Maximum planning security	Higher interest rate, lower flexibility

Fixed-Rate Mortgage vs. Variable-Rate Financing

Compared to a variable-rate loan (EURIBOR-based), a fixed-rate mortgage offers:

Advantages:

• Protection against rising interest rates
• Budget security for the entire fixed-rate period
• Easy planning without monthly surprises

Disadvantages:

• No benefit from falling interest rates (without special termination)
• Early repayment penalty in case of early repayment
• Typically slightly higher initial interest rate than with variable-rate loans

Optimal fixed-rate term: What the choice depends on

The question of the optimal fixed-rate term is one of the most important decisions in mortgage financing. It depends on several factors:

Current interest rate levels: During a period of low interest rates (such as 2020-2021), a fixed-rate period as long as possible is recommended to secure historically favorable terms in the long term. During a period of high interest rates (such as 2023-2024), a shorter fixed-rate period is often advantageous to benefit from expected interest rate cuts.

Planning horizon: Those who intend to hold the property long-term and do not plan to pay off the loan early benefit from long fixed-rate periods. Those planning to sell or move in the foreseeable future should choose a short fixed-rate period to avoid prepayment penalties.

Equity and risk tolerance: Those financing with little equity (full financing or 90% financing) face a high refinancing risk if interest rates rise after a short-term fixed-rate period. A long-term fixed-rate period is particularly important here.

Repayment rate: With a high repayment rate (3-5% p.a.), the remaining debt at the end of a 15-year fixed-rate period is low-the refinancing risk decreases accordingly. With a low repayment rate (1%), a high remaining debt remains, which becomes a refinancing risk.

Early repayment penalty: What is due in the event of early termination

The prepayment penalty (VFE) is the cost of repaying a fixed-rate mortgage early. The bank has lent the money at a fixed interest rate and, in the event of early repayment, must reinvest the freed-up capital at (potentially lower) market rates-the borrower compensates the bank for this loss of interest income.

The calculation of the prepayment penalty follows the present value model of the German Banking Industry Association (DK method). It depends on:

• Remaining term until the end of the fixed-rate period
• Difference between the loan interest rate and the current market rate
• Amount of the remaining debt

With a long remaining term and a contractual interest rate significantly above the market rate, the prepayment penalty can amount to several tens of thousands of euros. Calculator tools from the Consumer Advice Center can provide an estimate before you make a decision.

Practical Tip for Homeowners in Nuremberg and Franconia

We recommend that buyers in Nuremberg, Fürth, and Erlangen choose a long fixed-rate term of 15 to 20 years during periods of rising or high interest rates-this protects against the risk of significantly more expensive follow-up financing. During periods of low interest rates, a shorter fixed-rate term followed by renegotiation may be a good option.

The regional Sparkasse Nürnberg and VR Bank Nürnberg offer a comprehensive overview of current fixed-rate terms. We work with independent financial advisors who compare options across the market and are not tied to specific bank products-please contact us, and we’ll be happy to put you in touch.

Frequently Asked Questions

Can I terminate a fixed-rate mortgage early?

After the 10-year fixed-rate period has expired, you can terminate any fixed-rate mortgage with 6 months’ notice without paying an early repayment penalty (Section 489(1)(2) of the German Civil Code (BGB)). Within the 10-year period, early termination is only possible for a valid reason (e.g., sale of the property)-in which case an early repayment penalty is due.

What happens after the fixed-rate period ends?

The loan becomes due for refinancing. The remaining balance must either be paid off in full, refinanced, or extended under new terms. Ideally, you should negotiate the refinancing terms 12 to 24 months before the end of the fixed-rate period-with your current bank or a competitor who may offer better terms.

Is a forward loan worth it to lock in current terms?

A forward loan (a fixed interest rate secured in advance for future refinancing, up to 5 years in advance) can be worthwhile if rising interest rates are expected. The premium is approximately 0.01-0.02% per month, depending on the lead time. In an environment of falling interest rates, the forward loan is less attractive, as you could secure more favorable terms at the time of the actual refinancing.

Is a fixed-rate mortgage also suitable for investors?

Yes-the planning security offered by a fixed-rate mortgage is generally advantageous for landlords as well, since borrowing costs can be calculated over the long term. However, for investors who can fully deduct interest as business expenses, the fixed-rate loan (bullet payment, no principal repayment) is often more attractive from a tax perspective. Which option is more favorable depends on your personal tax rate and the planned holding period.

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