Full-payment loan

Full-payment loan - A full-payment loan is a mortgage in which the entire loan amount is repaid in full within the agreed fixed-rate period, so that no outstanding balance remains at the end of the term and no follow-up financing is required.

How does a fully amortizing loan work?

With a traditional amortizing loan, the fixed-rate period typically ends after ten or fifteen years, leaving a significant remaining balance that must be refinanced at prevailing market rates. The interest rate risk associated with renewal can be considerable-someone who financed at 2 percent in 2012 and had to renew in 2022 faced rates of 3.5 to 4 percent, which significantly increased the monthly payment.

With a full repayment loan, the monthly payment is calculated so that the sum of interest and principal repayment reduces the loan amount to exactly zero by the end of the fixed-rate period. The term is often 15, 20, or 25 years and corresponds to the fixed-rate period. At the end of the term, the loan is fully paid off-no remaining debt, no follow-up financing, no interest rate risk.

The key advantage lies in complete planning certainty: Borrowers know the exact monthly payment for the entire term right from the start. They cannot be surprised by rising interest rates during refinancing or by a more restrictive lending policy on the part of the bank.

Comparison of Monthly Payments

Conversely, the monthly payment on a full repayment loan is significantly higher than on an annuity loan with a low initial principal repayment, because the principal repayment component is much larger. A concrete calculation example illustrates this:

Loan of 300,000 euros, interest rate of 3.5 percent, 20-year term:

• Full repayment loan: monthly payment approx. 1,740 euros, remaining debt after 20 years 0 euros
• Annuity loan with 2 percent initial principal repayment: monthly payment approx. 1,375 euros, remaining debt after 20 years approx. 130,000 euros

The higher monthly payment of the full principal repayment loan-approx. 365 euros-also serves as protection against the risk of being forced to accept unfavorable terms when refinancing.

Interest Rate and Bank Terms

Whether banks offer an interest rate premium or a discount for a full repayment loan depends on the specific institution and the fixed-rate period. Some banks reward the higher repayment and the resulting lower default risk with a lower interest rate-the loan is paid off quickly, so the term of the collateral is short. Others charge a premium for the particularly long fixed-rate period, as they bear the interest rate risk over the entire term. Comparing multiple offers-from direct banks, savings banks, cooperative banks, and insurance companies-is therefore essential.

Tax Considerations for Investors

For investors, the fully amortizing loan is often less attractive than for owner-occupiers. The reason: Landlords can deduct the loan interest as business expenses against their rental income for tax purposes. With a fully amortizing loan, the interest component of the annuity drops to zero very quickly-meaning the tax deductibility diminishes more rapidly than with a traditional annuity loan. For investors with a high personal tax rate, a traditional amortization loan with lower principal payments and a longer interest-only period may be more tax-advantageous. This should always be discussed with a tax advisor.

Special Repayment Options

For a fully amortizing loan, special repayment rights should be contractually agreed upon in case the borrower is able to make unscheduled payments. Since a fully amortizing loan, by definition, is paid off in full at the end of the term, full early repayment without a special repayment right is only possible with a prepayment penalty-up to ten years after disbursement. After ten years, the borrower is entitled to the statutory special termination right under Section 489 of the German Civil Code (BGB) with a six-month notice period.

Practical Tip for the Nuremberg Region

Real estate prices in the Nuremberg metropolitan region have risen noticeably in recent years, and many buyers are financing amounts exceeding the 400,000-euro mark. When comparing regional banks-Sparkasse Nürnberg, Sparda-Bank, Volksbank Raiffeisenbank - to specifically inquire about full repayment terms and compare them with the standard annuity plan.

Especially with long fixed-rate periods of 20 years or more, it’s worth looking at the total cost over the full term rather than just the monthly payment. Those buying in sought-after locations such as Erlenstegen, St. Johannis, or Erlangen and planning to live there long-term are often better off with the planning security of a full repayment loan than with the residual debt risk of a short-term annuity loan-especially if their income is stable and the monthly payment is sustainable over the long term.

Frequently Asked Questions About Full-Repayment Loans

Is a full-repayment loan worth it when interest rates are low?

A full repayment loan can be particularly attractive during periods of low interest rates because the favorable interest rate can be locked in for the entire term. If interest rates rise later, borrowers benefit from not needing to refinance under more expensive terms. However, the higher monthly payment should be sustainable in the long term-even during temporary income losses (job change, parental leave, illness).

Can a fully amortizing loan be terminated early?

Under German law, borrowers are entitled to a special right of termination with six months’ notice after ten years have elapsed, in accordance with § 489 BGB, regardless of the agreed-upon fixed-rate period. Before this period expires, early repayment is generally only possible upon payment of an early repayment penalty. Special repayment options (e.g., 5 percent of the loan amount annually at no additional cost) should therefore be agreed upon at the time the contract is signed-even for fully amortizing loans.

Is there an interest rate discount for fully amortizing loans?

That depends on the bank. Some institutions grant an interest rate discount of 0.1 to 0.3 percentage points because the default risk is lower due to the high repayment amount and the short effective loan term. Other banks, however, charge a premium for the long fixed-rate period. We recommend obtaining at least three to five offers and comparing the total costs over the full term-not just the nominal interest rate, but the effective annual interest rate, including all costs and fees.

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