An annuity loan is a loan with a fixed installment amount for a contractually defined credit period (source: Annuitatendarlehen.org). As essential parameters, the initial repayment and the interest rate are fixed. With the monthly ongoing installment payment by the borrower or. The borrower reduces the remaining debt. In comparison with other types of loans, it is particularly important that the interest rate decreases and the repayment rate increases, while the amount of the installments remains the same. Illustrated by an example, this means that at an interest rate of bspw. 3 percent and a loan amount of 200.000 Euro not permanently 6000 Euro interest per annum accrue.
What are the advantages of an annuity loan??
A key aspect of this type of loan is a high degree of planning security. Throughout the entire process up to the first fixed interest rate, the costs are defined and plannable. In conjunction with the usual long loan terms, these installments are to be paid for usually at least ten years in the same amount. Depending on the credit institution, terms of 15 to 30 years are also offered. The development of interest rates on the capital market up to the fixed interest period has no effect. Thus, an adjustment of the prime rate does not pose a risk to the borrower or. the borrower represents.
Tip: With the help of annuity calculator (see annuity calculator.com) the annuity and all the details of the annuity loan can be calculated.
Another advantage is the high level of transparency. Under the Price Indication Ordinance, lending banks are obliged to show the nominal and effective interest rates. Thus the comparability is very good in the context of a credit comparison. Conducive in this connection is the additional representation of the additional costs.
What are the disadvantages of an annuity loan??
One drawback is low flexibility. Due to the fixed interest rates, the loan cannot usually be terminated prematurely during the fixed interest period.
The fixed interest rate may prove to be a disadvantage in the event of a reduction in the prime rate, because the borrower or. the borrower does not benefit. The reduction in the prime rate has no effect on the annuity loan.
In addition, in contrast to the full repayment loan, there is no certainty about the level of interest over the entire financing period due to the follow-up financing that is usually required.
What to consider when taking out an annuity loan?
If the contract is concluded during a period of high interest rates, a short fixed-interest period is worthwhile. If the prime rate falls, a lower rate can be agreed when the interest rate is rolled over. Contrary to this, in phases with low interest rates, the longest possible terms are worthwhile. This ensures cost security in the long term.
Depending on the bank, one or more unscheduled repayment(s) can be contractually agreed upon. In this case it is possible with early unscheduled repayments to reduce the loan amount and if necessary. to reduce the residual term.
Another factor to be taken into account when deciding on the loan parameters is age. At a younger age, taking out a loan for an expensive property is possible at a lower rate due to the longer term of the loan. The goal is to have the financing paid in full by the time you retire.
How long does it take to repay an annuity loan??
A key parameter for the duration of repayment of an annuity loan is the interest rate amount. At higher interest rates, the rate is relatively high at the beginning of the loan, and decreases more rapidly as the loan is extended than at lower interest rates. Therefore, the general rule is that if interest rates are low, the monthly installment amount will be lower. With a lower amortization, a longer term is the result compared to higher interest rates.
With a loan amount of 250.000 and an interest rate of 1.5 percent, with a repayment of 4 percent, the monthly installment is 1.146 euros. For this example, the duration of repayment is 21 years and 4 months.
If the loan amount is 150.000 euros, and the interest rate is 2.5 percent and a repayment rate of 2.5 percent, the monthly installment is 625 euros. In this example, it takes just under 28 years to repay the loan in full.
Which factors influence the interest rate of an annuity loan??
The ECB key interest rate is the main factor influencing the interest rate of an annuity loan.
In addition to the prime rate, the amount of equity is an important parameter. For the bank, the security in the form of reserves of the respective debtor is decisive for the granting of a loan.
Why it makes sense to compare providers?
Against the backdrop of the long maturities of loans, even small deviations in interest rates are crucial for major effects. Depending on the amount of the loan, even small differences in the interest rate after the decimal point can lead to differences in the four- or five-figure range. five-digit range. For this reason an intensive comparison is worthwhile. In addition, details of the contracts such as early repayment penalties or an existing revocation instruction should also be taken into account in the examination.
In connection with the financing of a property, the loan is usually provided with a fixed term of interest. According to the contractual arrangements with the credit institution, this fixation can be made for ten years. Loans can likewise be made with a longer fixed interest rate of bspw. 15 or up to 30 years can be concluded.
After the expiry of the fixed interest rate, there is a residual debt, depending on the degree of repayment, which is settled with a follow-up financing. Due to the length of the fixed interest rate, a time fixation can already be made when the loan is concluded, which provides security about the costs for a longer or. shorter period of time means.