Mortgages: Fixed-Rate Periods, Repayment Rates and Total Cost
Calculate an annuity mortgage payment, the remaining debt after the fixed-rate period and the interest you pay, and understand the key contract terms.
What you will learn
- How the German annuity loan (Annuitätendarlehen) works and how the monthly payment is set.
- What the fixed-rate period (Sollzinsbindung) and the remaining debt (Restschuld) mean for your risk.
- How a higher initial repayment rate changes total interest and the time to be debt-free.
- Which contract terms matter: special repayments, early repayment charges and commitment interest.
Explanation
The difference between a nominal and an effective interest rate was covered in the personal finance course. Here we apply it to property loans. In a German offer, the Sollzins is the nominal rate used to calculate interest; the Effektivzins (effective annual rate) also includes the effect of monthly payments and certain costs, so use it to compare offers.
The annuity loan
Most German home loans are annuity loans: you pay the same amount every month during the fixed-rate period. The yearly payment (the annuity) is set as:
Annual payment = loan × (interest rate + initial repayment rate)
The initial repayment rate (anfängliche Tilgung) is the share of the loan repaid in the first year, for example 2%. Each month, interest is calculated on the remaining balance (balance × rate ÷ 12). The rest of the payment repays debt. As the debt falls, the interest part shrinks and the repayment part grows, although the payment stays the same.
Fixed-rate period and remaining debt
The fixed-rate period (Sollzinsbindung), often 5, 10, 15 or 20 years, is the time for which the interest rate is guaranteed. At its end, a remaining debt (Restschuld) is usually left. You must then refinance it at whatever rate the market offers (Anschlussfinanzierung). This is the main interest-rate risk of a German mortgage (lesson 7).
By law (§ 489 BGB), a borrower may terminate a fixed-rate loan ten years after full payout with six months' notice, even if the fixed period is longer. Before that, early repayment usually triggers an early repayment charge (Vorfälligkeitsentschädigung), which compensates the bank for lost interest.
Other terms to check
- Special repayments (Sondertilgungen): the right to repay extra, for example a fixed percentage of the loan per year, without a charge.
- Repayment-rate changes: some contracts allow you to raise or lower the repayment rate a limited number of times.
- Commitment interest (Bereitstellungszinsen): charged if you do not draw the loan within an agreed period, common in new-build projects.
- Loan-to-value (Beleihungsauslauf): the loan as a percentage of the bank's valuation of the property. A higher loan-to-value usually means a higher rate.
Worked example
Hypothetical example: a loan of €300,000, Sollzins 3.5%, fixed for 10 years, monthly payments. We compare an initial repayment rate of 2% with 3%. Assumptions: the rate stays the same after 10 years for the "years to debt-free" figure. Excluded: fees, special repayments, taxes.
Monthly payment
- 2% repayment: €300,000 × (3.5% + 2%) = €16,500 per year ÷ 12 = €1,375 per month.
- 3% repayment: €300,000 × (3.5% + 3%) = €19,500 per year ÷ 12 = €1,625 per month.
First month with 2%: interest = €300,000 × 3.5% ÷ 12 = €875; repayment = €1,375 − €875 = €500.
| After 10 years | 2% repayment | 3% repayment |
|---|---|---|
| Monthly payment | €1,375 | €1,625 |
| Total paid (120 months) | €165,000 | €195,000 |
| Interest paid | about €93,280 | about €87,430 |
| Debt repaid | about €71,720 | about €107,570 |
| Remaining debt | about €228,280 | about €192,430 |
| Years to debt-free (same rate) | about 29 | about 22 |
Paying €250 more per month saves about €5,850 interest in the first 10 years, leaves about €35,850 less debt to refinance, and shortens the total term by about seven years. The figures were calculated month by month and rounded to €10.
Common mistake
Practice activity
A loan of €200,000 has a Sollzins of 4% and an initial repayment rate of 2.5%, fixed for 10 years, monthly payments. Calculate (a) the monthly payment, (b) the interest and repayment parts in the first month. Then (c) explain whether the remaining debt after 10 years will be above or below €150,000 (the repayment part grows over time).
Show solution
- (a) €200,000 × (4% + 2.5%) = €13,000 per year ÷ 12 ≈ €1,083.33 per month.
- (b) Interest: €200,000 × 4% ÷ 12 ≈ €666.67. Repayment: €1,083.33 − €666.67 = €416.66.
- (c) In year 1 the debt falls by about €5,000 (2.5%). The repayment part grows each month, so over 10 years more than €50,000 is repaid. A month-by-month calculation gives a remaining debt of about €138,650, below €150,000. Interest paid over 10 years: about €68,650.
Limitations: real offers may have fees, a slightly different day-count method and special repayments, so the bank's repayment schedule (Tilgungsplan) is the binding figure.
Key takeaways
- Annual payment = loan × (interest rate + initial repayment rate); compare offers using the Effektivzins.
- The remaining debt at the end of the fixed-rate period is exposed to future interest rates.
- A higher repayment rate costs more per month but lowers total interest and refinancing risk.
- Check special-repayment rights, early repayment charges and the § 489 BGB ten-year rule.
Next step
In the next lesson you will use these loan numbers in a structured comparison of renting versus buying.
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