Repayment

Principal repayment - Principal repayment refers to the scheduled repayment of a loan and, along with interest, is the second key component of every mortgage payment. Choosing the right principal repayment rate is one of the most important decisions when taking out a mortgage - it determines how long the loan will last and how much interest will be paid in total.

What does principal repayment mean in mortgage financing?

With a traditional amortizing loan - the most common form of mortgage financing in Germany - the monthly payment consists of interest and principal repayment. The principal portion goes directly toward repaying the loan, while the interest portion covers the cost of the loan. Since the remaining debt decreases with each principal payment, the interest portion also decreases over time, and the principal portion within the fixed monthly payment automatically increases-a mechanism that significantly accelerates debt repayment toward the end of the term.

The initial repayment rate indicates what percentage of the loan amount is repaid in the first year. We recommend a repayment rate of at least 2%, preferably 3% or more. The reason: With a repayment rate of only 1% and an interest rate of 3.5%, it takes over 40 years to fully repay a loan-the total interest burden then often exceeds the original loan amount.

The amortization schedule shows the total repayment over the term in a tabular overview: monthly payment, interest portion, principal portion, and remaining balance for each period. This document is a mandatory component of every loan agreement and an indispensable tool for financial planning. In particular, it helps estimate the remaining debt at the end of the fixed-rate period and plan follow-up financing well in advance.

A repayment deferral allows you to temporarily suspend principal payments and pay only interest. This can be helpful during financial difficulties, but it extends the total term and significantly increases total interest costs-generally, a repayment deferral is financially disadvantageous and should only be used as a short-term emergency measure.

With a full repayment loan, on the other hand, the repayment amount is calculated so that the loan is fully repaid within the fixed-rate period-this offers maximum planning security and completely eliminates the refinancing risk. The monthly payments are significantly higher, however, and the full repayment loan is particularly suitable for borrowers with high and stable incomes.

Extra Payments and Their Effect

An extra payment is an additional, unscheduled payment toward the remaining debt that exceeds the agreed-upon monthly installment. Most mortgage loans allow annual extra payments of 5-10% of the original loan amount without a prepayment penalty. This option should be actively negotiated and agreed upon in writing when the contract is signed.

A concrete calculation example illustrates the effect: For a loan of 300,000 euros with a 3.5% interest rate and a 2% initial principal repayment, an annual extra payment of 5,000 euros saves approximately 25,000-35,000 euros in interest over the entire term and shortens the repayment period by several years. Extra payments have a greater impact the earlier in the term they are made, since the remaining balance is particularly high in the early years.000 euros** in interest and shortens the repayment period by several years. Extra payments have a greater impact the earlier in the term they are made, since the remaining debt is particularly high in the early years and the interest savings per euro repaid are therefore maximized.

The right to make extra payments is not automatically included in every loan-it must be contractually agreed upon. If the contract does not provide for a special repayment right, an early repayment penalty applies to unscheduled repayments. Legally, borrowers are entitled to a special right of termination under Section 489 of the German Civil Code (BGB) after a term of ten years-but this does not replace any contractually agreed earlier special repayment rights.

Repayment and Taxes for Rented Properties

For rented properties, it is important to understand the tax treatment of repayments: The principal portion of the monthly payment is not deductible as income-related expenses-while it reduces the debt, it is not an expense item for tax purposes. Only the interest portion of the payment is deductible. Landlords should take this into account in their cash flow planning: The tax savings from interest expenses decrease with each repayment-which is economically positive but gradually increases the tax burden.

Practical Tip for Nuremberg and Franconia

Given the real estate prices in the Nuremberg metropolitan region-with average purchase prices for condominiums ranging between 2,500 and 7,000 euros per square meter depending on location-realistic principal repayment rates are crucial. We advise buyers in the region to calculate their monthly payments so that, in addition to regular principal payments, there is room for extra payments and maintenance reserves.

Especially those buying in up-and-coming neighborhoods such as Eberhardshof, Lichtenhof, or Gebersdorf should base their financing on a solid repayment plan to benefit from long-term appreciation rather than suffer from interest costs. A rule of thumb: The total monthly burden from the loan, building maintenance fees, and maintenance reserves should not exceed 35-40% of net income in order to maintain sufficient financial flexibility.

Frequently Asked Questions

What repayment rate is recommended?

We recommend an initial repayment rate of at least 2-3%. The higher the repayment, the faster the loan is paid off and the lower the total interest costs. In the current interest rate environment (interest rates of 3.5-5%), a higher repayment rate is more important than during periods of low interest rates, since the interest portion of the payment is already significant and debt reduction progresses only slowly without sufficient repayment. As a guideline: The remaining debt after a 10-year fixed-rate period should ideally be less than 75% of the original loan amount.

Can the repayment rate be changed during the term?

Many banks offer a repayment rate adjustment that allows you to adjust the repayment rate once or twice during the fixed-rate period-for example, in the event of a pay raise (higher repayment) or parental leave (lower repayment). This flexibility should be agreed upon at the time the contract is signed, as it is not included as standard in every loan. Some banks allow the change free of charge, while others charge a small processing fee.

What happens if the remaining debt is still high after the fixed-rate period ends?

If the fixed-rate period expires and there is a high remaining debt, you must arrange refinancing at the market interest rates in effect at that time. If interest rates have risen in the meantime, the monthly payment can be significantly higher-a classic “interest rate shock.” We recommend choosing a repayment plan from the start that ensures the remaining debt has fallen below 70% of the mortgage value after ten or fifteen years. Alternatively, a forward loan can lock in future interest rates today, or a home savings contract can be used as an interest rate hedging instrument.

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