Amortization rate

Amortization rate - The amortization rate indicates the percentage of the loan amount that is used each year to repay the loan. For an annuity loan, the amortization rate, together with the interest rate, determines the monthly payment and the total term of the financing. The higher the amortization rate, the faster the loan is repaid-but the higher the monthly payment. Choosing the right amortization rate is therefore one of the most important factors in mortgage financing.

Impact on Term and Total Costs

The amortization rate has a huge impact on the total term and the interest costs. For a loan of 300,000 euros with a 3.5% interest rate, the following overview applies:

• 1% principal repayment: Term approx. 46 years, total interest approx. 290,000 euros
• 2% principal repayment: Term approx. 28 years, total interest approx. 167,000 euros
• 3% principal repayment: Term approx. 21 years, total interest approx. 118,000 euros
• 4% principal repayment: Term approx. 17 years, total interest approx. 92,000 euros

In this example, the difference between 1% and 3% principal repayment amounts to nearly 172,000 euros less in interest-with an additional monthly cost of only approx. 500 euros (increasing the monthly payment from approx. 1,125 to 1,625 euros). This makes it clear: Every additional percentage point of principal repayment is an exceptionally profitable “investment” in your own financial future.

Initial principal repayment vs. effective principal repayment

The repayment rate agreed upon in the loan agreement is the initial principal repayment - that is, the percentage that is effectively repaid in the first year. With an annuity loan, the actual principal portion increases with each payment because the interest portion shrinks relative to the decreasing remaining debt-the payment amount stays the same, but an increasing portion of it goes toward principal repayment. This effect is particularly pronounced toward the end of the term: In the final years of the term, the payment consists almost entirely of principal repayment.

Banks refer to this mechanism as “principal repayment increase through interest savings”. It works automatically without any further action on the part of the borrower and is the reason why an annuity loan is so efficient. However, it requires that the initial principal repayment be set high enough-with a 1% initial principal repayment, the increase in principal repayment is also very small, and it takes decades for noticeable effects to become apparent.

Banks today recommend an initial repayment rate of at least 2-3% so that the loan is paid off within a financially reasonable timeframe and the remaining debt is manageable after the first fixed-rate period expires.

Changing the Repayment Rate: Flexibility During the Term

Many banks offer their customers the option to change the repayment rate during the fixed-rate period-the so-called repayment rate adjustment. Typically, this is possible one to three times during the fixed-rate period, and the new repayment rate must fall within an agreed-upon range (e.g., between 1% and 5%).

This flexibility is valuable:

• In the event of a pay raise or inheritance: Increase the repayment rate and pay off the debt faster
• In the event of parental leave or a job change: Temporarily reduce the repayment rate and preserve liquidity
• When starting to rent out the property: Adjust the repayment rate if your tax situation changes

The right to change the repayment rate must be explicitly agreed upon in the loan agreement-it is not a standard option guaranteed by law. Therefore, be sure to actively ask about this when signing the contract and have the terms confirmed in writing.

Practical Tip for Homeowners in Nuremberg

We recommend that homebuyers in the Nuremberg metropolitan area choose an initial repayment rate as high as financially feasible-ideally at least 2%, preferably 3%. For a typical condominium in Nuremberg (purchase price €400,000, loan €300,000), the monthly payment at a 3.5% interest rate is:

• 2% principal repayment: approx. €1,375/month
• 3% principal repayment: approx. 1,625 euros/month

The difference of 250 euros per month saves approximately 50,000 euros in interest over the entire term and shortens the term by 7-8 years. For buyers who wish to rent out the property, the following applies: Check whether the rental income covers the payment at a 3% principal repayment rate-if so, the higher principal repayment is almost always the better choice.

Also, be sure to look for the option to adjust the repayment rate two to three times free of charge during the term-many banks offer this, but it must be specified in the contract. We’d be happy to connect you with independent financing specialists in the region who can calculate various repayment scenarios tailored to your specific situation.

Frequently Asked Questions

Can I change the repayment rate during the term?

Many banks offer a repayment rate adjustment-typically two to three times during the fixed-rate period, within the range of 1-5% of the initial repayment. This is helpful in the event of changes in income: if your salary increases, the repayment can be raised; if you face financial difficulties, it can be temporarily lowered. This right must be explicitly agreed upon in the loan agreement-ask about it before signing the contract and clarify whether the change is free of charge or subject to a fee.

Why do banks recommend higher repayment rates today than in the past?

During periods of low interest rates (2010-2022), a low repayment rate of 1% was particularly problematic: Repayment barely progressed, and when interest rates rose after the fixed-rate period expired, there was a risk of an interest rate shock-the new monthly payment suddenly exceeded the old one by a wide margin. Many homeowners who financed their homes during the low-interest-rate phase with a 1% repayment rate and a 10-year fixed-rate period now face a renewal at 4% instead of 1% interest, with the remaining debt barely reduced. With today’s higher interest rates, the repayment momentum is stronger from the start, but the underlying problem remains: A repayment rate that is too low creates a high refinancing risk.

Which is better: higher principal payments or extra payments?

Both reduce interest costs, but the mechanisms are different. A higher initial principal payment has a consistent and reliable effect from day one-it is the solid foundation of any financing. Extra payments offer flexibility: You can pay when you have the funds, but you don’t have to. The optimal approach is a combination: A solid initial repayment of 2-3% as a mandatory portion, supplemented by a right to make extra payments of 5-10% per year using bonus payments, tax refunds, inheritances, or other one-time amounts. This way, you benefit from a regular increase in principal payments while retaining the flexibility to make additional payments in good years.

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