How does an Annuitaet

The annuity loan - simply explained

We would like to introduce you to a classic in real estate financing: the annuity loan. If you don't have enough equity, this loan could be your ticket to your dream home. But what exactly is it all about? In most cases, an annuity loan is used to finance larger loan contributions for the purchase of a property. The reason for this is the associated planning security, as you know exactly what amount has to be paid each year until the end of the term.

definition

The annuity loan is a specific variant of the mortgage loan. It works in such a way that the same high installments are repaid over the years. This installment is called annuity in technical terms and consists of an interest and a repayment component.

Composition of the annuity:

Annuity = interest component + repayment component

How does it work with the interest?

The interest is usually repaid monthly and is calculated from the amount owed. Interest repayment may also be possible at other intervals. With the repayment, the loan debt is paid month after month. The interest rate is set for a certain fixed interest rate period - this is also referred to as fixed interest rate. This is an average of 5-15 years. However, there are even banks that fix interest rates for up to 30 years. With the repayment, the interest portion becomes smaller and smaller over time and the repayment portion increases constantly.

TIP: Due to the favorable conditions currently prevailing on the capital market, it is worth taking out an annuity loan with a higher repayment rate than the normal 1%.

There are two options when taking out the loan:

Full repayment loan

The repayment rate can be determined in such a way that the loan is paid in full after the fixed interest period has expired - see our example below. It is advisable to agree a slightly higher interest rate (ideally higher than 3%) in order to be able to repay the loan amount in the specified period and to keep the term within a manageable framework. However, this leads to higher monthly payments.

The advantage of this variant is that due to the fixed monthly installments, the upcoming repayments can be planned 100%.

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Remaining debt at the end of the fixed interest period

However, the following agreement can also be made: After the fixed interest rate has expired, a residual debt is still open, which is then settled by a residual debt or an installment loan. The amount of the initial interest rate can be determined by yourself, as long as it is at least 1-2%. It would be even better if a higher percentage is repaid, otherwise the loan term will be extended. In this case, too, the loan can be calculated very well, as the interest and repayment plan helps to plan the remaining debt at the time of the follow-up financing.

Let's show you the whole thing with an example:

We'll show you how to create your own repayment plan. In our example, a loan amount of 110,000 euros was taken out for a term of 15 years as part of a full repayment loan. The interest rate is 2% and the repayment rate is 3%. The annual annuity is therefore 8,560.80 euros. The annuity was calculated using the following formula:

If we now use the information on our annuity loan in this formula, the following annual annuity results:

yearAnnuityinterestRepayment portionRemaining debt at the end of the period
18.560,80 €2.200,00 €6.360,80 €103.639,20 €
28.560,80 €2.072,78 €6.488,02 €97.151,18 €
38.560,80 €1.943,02 €6.617,78 €90.533,40 €
48.560,80 €1.810,67 €6.750,13 €83.783,27 €
58.560,80 €1.675,67 €6.885,14 €76.898,13 €
68.560,80 €1.537,96 €7.022,84 €69.875,29 €
78.560,80 €1.397,51 €7.163,30 €62.712,00 €
88.560,80 €1.254,24 €7.306,56 €55.405,43 €
98.560,80 €1.108,11 €7.452,69 €47.952,74 €
108.560,80 €959,05 €7.601,75 €40.350,99 €
118.560,80 €807,02 €7.753,78 €32.597,21 €
128.560,80 €651,94 €7.908,86 €24.688,35 €
138.560,80 €493,77 €8.067,03 €16.621,32 €
148.560,80 €332,43 €8.228,38 €8.392,94 €
158.560,80 €167,86 €8.392,94 €0,00 €

The calculation

Then you calculate the interest for the first year of your loan by calculating 2% of the total loan amount. The interest in the 1st year thus results in 2200 euros in our example. The annuity less of the interest results in the repayment portion, i.e. 8,560.80 euros - 2,200 euros = 6,488.02 euros.

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If you now subtract the repayment portion from the total loan amount, you get the value for the remaining debt of your loan at the end of the 1st period. In the next year, the annuity will still be the same, but the portion of the interest to be paid has decreased because your remaining debt has also decreased.

You can find out how high the interest component is by calculating 2% of the remaining debt. If you subtract the new value from the annuity, there is again a repayment portion, which you subtract from the remaining debt of the previous period in order to get the amount of the remaining debt at the end of the 2nd year.

If you calculate according to this principle until the end of the term, you will see that at the end of the 15th year your remaining debt is 0 euros.

TIP: It would make sense to calculate a repayment plan like the one described above with multiple interest rates. It is important to note whether the amount of the repayment rate - converted to the monthly charge - corresponds to the disposable income. In other words: do you have enough money over the entire duration of the financing to pay the calculated amount to the bank every month?

What security does the bank need from me?

A land charge or a mortgage is entered in the land register as security for the loan. This gives the lending bank a lien with which it can assert its claims in the form of a foreclosure sale in the event of outstanding repayments.

The annuity loan has advantages

Constant interest rate and constant amount of annuities

Probably the biggest advantage is the constant interest rate and constant amount of annuities over the entire credit period, since no unexpected payments can arise.

Special repayments possible

When taking out the annuity loan, there is the option of contractually agreeing special repayments with the bank. As a borrower, you remain flexible and can repay part of the loan amount annually as a special payment. This will shrink your remaining debt and shorten the term of the loan.

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Positive inflationary effect

Furthermore, the cause of inflation is that our money is worth less and less over time and therefore the high repayments at the end of the term are to be seen as extremely positive.

Unfortunately, there are also disadvantages

No contract changes during the term

What's that pecks: Contract changes during the term are not planned. This means that when the annuity loan is taken out, it must be ensured that the monthly repayment installments can be constantly repaid. If you need a special repayment in the next few years, it must be stated in the contract!

Interest rate risk at the end of the fixed interest rate

Once the fixed interest period has expired, there is a risk that the interest rates for the follow-up financing will increase unexpectedly. You never know how the capital market will develop and that is exactly where the risk lies. It is possible that the interest rate at the end of the fixed interest period is much higher than at the beginning when the annuity loan was contracted.

Conclusion

  • Standard solution for real estate financing
  • Variant of the mortgage loan
  • Annuity that remains the same every year, consisting of an interest and a repayment component
  • The higher the repayment, the shorter the term
  • Monthly interest repayment with an ever-decreasing interest component
  • Recommended equity ratio of at least 20%
  • Average term: 15 years
  • Differentiation between full repayment loans and loans with residual debt at the end of the fixed interest period
  • Agreement of special repayments possible
  • Security through land charge or mortgage with entry in the land register
  • Changes to the contract are not possible during the term
  • Existing interest rate risk at the end of the fixed interest rate
  • Some banks offer a term of up to 30 years
  • Consider different scenarios for repayments based on the repayment schedule

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