Combining fixed-interest period and repayment wisely

Fixed-interest period and repayment are often considered separately, yet together they determine how safe and how expensive your financing will be. Looking only at the lowest interest rate often means giving away money.

Fixed-interest period: security has a price

A long fixed-interest period of 15 or 20 years costs a little more interest but protects you from rising rates. In uncertain market phases, this planning security is often worth more than the last tenth of a point.

There is also an advantage that many borrowers do not know about. Under Section 489 of the German Civil Code, you may terminate any property loan ten years after the funds have been fully released with six months’ notice, without any early repayment charge. A 20-year fixed-interest period is thus a one-sided option in your favour. If rates rise, you keep your favourable terms to the end. If they fall, you simply exit after ten years and refinance.

Repayment: the underestimated lever

A higher initial repayment rate noticeably shortens the term and lowers the interest costs over the entire financing. Even the jump from 2 to 3 percent repayment can make you debt-free years earlier.

The relationship between repayment rate and total term is not linear; small changes have a big effect. The following overview shows rounded terms until full repayment at an assumed borrowing rate of 3.5 percent.

A repayment of only 1 percent leads, at today’s interest rate level, to terms that extend well into retirement. As a lower limit for new agreements we recommend 2 percent in most cases, preferably more if the instalment allows.

Worked example: €250 more instalment, €36,000 less debt

A loan of €300,000 with a 3.5 percent borrowing rate and a ten-year fixed-interest period shows what the repayment rate actually does. Initial repayments of 2 and 3 percent are compared.

The €250 higher instalment saves just under €5,900 in interest over ten years and reduces the remaining debt by almost €36,000. This also lowers the risk at the follow-on financing, because a smaller remaining debt can also tolerate a higher interest rate level.

10, 15 or 20 years? A guide

A ten-year fixed-interest period is suitable if the remaining debt at the end is manageable or a foreseeable inflow of money secures the repayment, such as a maturing life insurance policy. Fifteen years is the balance between price and security for many families. Twenty years and more pay off above all at a low interest rate level, with a tight household budget without room for interest rate surprises, and for anyone who wants to stay flexible with the special right of termination after ten years.

Plan for flexibility

Unscheduled repayment rights and the option to adjust the repayment rate usually cost little but give you leeway if your life changes. We make sure your financing can breathe.

Free unscheduled repayments of 5 percent of the loan amount per year and two to three free changes of the repayment rate during the fixed-interest period are customary. Anyone expecting bonus payments, an inheritance or maturing savings contracts should negotiate these rights specifically. In the consultation we calculate the variants with your figures and show which combination of fixed-interest period and repayment suits your project.

Keep an eye on the remaining debt

Besides instalment and term, the remaining debt at the end of the fixed-interest period belongs in every decision. It is the amount you have to refinance at the interest rate level applicable then. A short fixed-interest period with low repayment creates the largest exposure, because a high remaining debt may then meet increased rates. The tables above show how strongly the repayment rate influences this remaining debt. So for every offer, work out what instalment would result if the follow-on rate were two percentage points higher. If the financing remains affordable even then, the combination is soundly chosen.

Unscheduled repayment or a higher repayment from the start?

Both have their place. The firmly agreed repayment rate works reliably every single month and disciplines the repayment. Unscheduled repayments are the flexible addition for money that comes irregularly, such as bonuses, tax refunds or an inheritance. If you have to choose between a higher instalment and generous unscheduled repayment rights, you usually do better with the higher fixed repayment, because unused unscheduled repayment rights do not save a cent. In the consultation we plan both so that the compulsory instalment remains safely affordable and leeway can still be used.

Full repayment loan: worth considering

If you want to see the financing through to debt freedom in one go, you can choose a full repayment loan. Here the fixed-interest period and the term are identical; at the end the loan is fully repaid and follow-on financing is no longer an issue. Banks often reward this predictability with an interest discount. The price is a comparatively high instalment and little flexibility, because the high repayment is firmly agreed. The model is well suited to households with a secure, high income and the clear goal of being debt-free by a fixed date.