Partial repayment

Partial repayment (also known as an extra payment) is the unscheduled, early repayment of a portion of the outstanding loan balance that exceeds the agreed-upon regular repayment installments. It immediately reduces the outstanding balance, shortens the term of the loan, and significantly reduces the total interest burden. Whether and to what extent partial repayments are possible depends on the loan agreement-borrowers should actively negotiate this right before signing the loan agreement and have it set forth in writing in the contract.

Right to make special repayments: What should be included in the loan agreement

Most banks grant their customers an annual right to make special repayments of 5% of the original loan amount on real estate loans-without a prepayment penalty. Some banks also offer 10%, though at a slightly higher interest rate. When market interest rates are favorable, it makes sense to agree to the highest possible special repayment rights, even if this means accepting a slightly higher interest rate-because the additional interest costs are generally significantly lower than the benefit of flexibility.

Those who waive the right to make extra payments must pay an early repayment penalty for unscheduled repayments, which compensates the bank for the interest it would have earned during the remaining fixed-rate period. This penalty can be substantial: With a remaining loan balance of 200,000 euros and five years left on the fixed-rate period, it can easily amount to 15,000-25,000 euros. The bank calculates the penalty using the asset-liability method or the asset-asset method-the exact calculation method is specified in the loan agreement and should be reviewed before signing.

Tip: Special repayment rights cannot be combined unless otherwise agreed. If you do not exercise your right in a given year, you cannot use it retroactively the following year to repay a double amount. Therefore, make sure to include explicit agreements regarding the ability to combine these rights if you wish to do so.

When is a partial repayment worthwhile?

A partial repayment is always worthwhile when the loan interest rate is higher than the return on alternative investments-calculated after taxes. In a high-interest-rate environment, this is almost always the case. Specifically: If you have a loan at 4% interest and finance the extra payment with money that would otherwise be sitting in a money market account earning 3% (effectively only ~2.2% net after applicable taxes on interest income), you save around 1.8 percentage points through the extra payment-guaranteed and risk-free.

Calculation example: €10,000 in extra payments at a 4% loan interest rate and a 20-year remaining term saves around €8,900 in interest over the entire term-even if the remaining debt continues afterward. With a €20,000 extra payment, this amounts to nearly €18,000. This interest savings is a risk-free return that cannot be achieved with any secure investment under comparable terms.

Nevertheless, your liquidity reserve should not be sacrificed for extra payments. We recommend keeping at least three to six months’ salary as a liquidity reserve before making extra payments.

Tax Aspects of Partial Repayment

For owner-occupied properties, partial repayment has no tax implications, as interest on owner-occupied property is not tax-deductible in Germany. The decision to make an extra payment should be based purely on economic considerations.

For rental properties, loan interest is considered income-related expenses-while a partial repayment reduces the interest burden, it simultaneously reduces the tax-deductible income-related expenses. For landlords in high income tax brackets, it may therefore make more sense to use the liquidity for further investments rather than for repayment, as the leverage from borrowed capital generates a tax advantage. For landlords, it is worthwhile to have a tax advisor perform a precise tax calculation before making the partial repayment.

Important: If a property previously used as a primary residence is rented out, the tax treatment changes from the date of rental-the financing interest from that point on is deductible as income-related expenses. Making a special repayment shortly before the start of the rental period can unnecessarily reduce the deductible interest expense.

Practical Tip for Property Owners in Nuremberg and Franconia

In Nuremberg and Franconia, many property owners financed real estate at very favorable interest rates between 2010 and 2022-in some cases below 1.5% for ten-year fixed-rate periods. These loans will expire for refinancing in the coming years, and interest rates have since risen significantly. We strongly advise owners in this situation to consistently exercise their right to make extra payments while the old fixed-rate period is still in effect.

A low remaining balance at the time of renewal means either lower monthly payments or a shorter term-both of which reduce financial risk in the face of rising interest rates. Someone who is currently financing at 1.5% and must refinance at 4% in three years can reduce the remaining debt by 15% by then through annual extra payments of 5%-a significant buffer against the increase in interest costs.

Contact us-we’ll connect you with independent financial advisors in the Nuremberg metropolitan area who will analyze your specific situation and develop a repayment plan for your follow-up financing.

Frequently Asked Questions

How much can a partial repayment be?

That depends on the loan agreement. Annual special repayments of 5-10% of the original loan amount without prepayment penalties are common. Amounts exceeding this require a prepayment penalty or are only possible at the end of the fixed-rate period. After the fixed-rate period expires-i.e., upon refinancing-the entire loan can be repaid without penalty, as the bank no longer has an interest in securing the interest rate. Additionally, under Section 489 of the German Civil Code (BGB), borrowers have the right to terminate a loan after a ten-year term (from the date of full disbursement) with six months’ notice without an early repayment penalty.

What is the difference between a special repayment and an increased repayment installment?

A special repayment is a one-time, unscheduled payment; an increased repayment installment is a permanent adjustment to the monthly payment. Both reduce the remaining debt, but the special repayment offers more flexibility-it can be used in financially good years and skipped in bad years. An increased repayment rate commits the borrower to higher payments on a permanent basis and can become a burden in the event of a loss of income. For self-employed individuals and freelancers with fluctuating income, the special repayment option is therefore often the more sensible choice.

Can I repay my loan in full early?

Yes, but an early repayment penalty will apply if the fixed-rate period is still in effect. This penalty compensates the bank for the loss of interest income for the remaining fixed-rate period and can amount to five figures if the remaining term is long and the loan amount is high. If the loan has already been outstanding for more than ten years (calculated from the date of full disbursement), borrowers have a statutory special right of termination under Section 489(1)(2) of the German Civil Code (BGB) with a six-month notice period-without an early repayment penalty. This right applies even if the contractually agreed fixed-interest period is still ongoing.

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