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What is an annuity loan?
An annuity loan is a form of loan with constant repayment installments. In contrast to a repayment loan, the amount of the installments to be paid for it remains the same over the term if a fixed-interest period has been fixed for the entire term.
The installment remains the same for annuity loans.
If you want to buy your dream property, you have to bear high costs and usually choose a financing over several years. The usual way to an annuity loan is via the mortgage loan. This can cover up to 80 % of construction and land costs. Whereby usually a variant of the mortgage loan is taken up namely the annuity loan.
Annuity means “the rate remains the same over the entire term”, so the advantage of an annuity loan is already mentioned by name – you already know at the beginning of financing the sum, which is to be paid monthly to the lender until the end of the term. In this way, the borrower is protected against unrecognised charges or additional receivables. The mortgage loan is secured by a mortgage on the property entered in the land register.
Typical for an annuity – the redemption rises as the interest component falls
The constant monthly installment of the annuity loan has two components: an interest portion and a repayment portion. Initially, the repayment portion of the loan is small. However, with each payment the residual debt decreases, the interest portion of the instalment decreases and the repayment portion increases. It is therefore logical that the higher the redemption, the shorter the term. At the end of the annuity, the loan is continued with the remaining debt. The annuity loan is the most common form of loan. Payment of the instalments is usually made monthly, but other intervals can also be agreed.
With low mortgage interest rates, a higher repayment than the usual 1% is therefore advisable in order to pay off the loan more quickly.
Annuity Loans – The Most Popular Construction Loan
Beyond a fixed amount of instalments, many mortgage lenders offer the borrower a fixed interest rate for a longer period of time – the fixed interest rate. This minimises the borrower’s financial risk, as the instalment amount remains constant over the entire term. The agreement of a long term can keep the instalments small and above all constant, so that the client does not have to expect any further high financial burdens.
A borrower can usually choose the amount of repayment himself at the beginning. Banks, however, require at least 1% redemption. Today, most construction financing is financed with annuity loans. This financing method can be calculated solidly. This form of repayment loan is the classic financing method, especially for owner-occupied housing.
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In the video below the annuity loan is explained in detail.
Calculate follow-up financing after the fixed-interest period
At the end of the fixed-interest period of approx. 15 years, a follow-up financing must be sought, because the loan amount was not completely paid off. In the case of an annuity loan, the monthly charge to the customer then depends on the interest rate applicable at that time. The lower it is, the better it is for the borrower. If the remaining debt from the loan is now to be paid off over a period of ten years, at a borrowing rate of around 4.0 % the instalments are at a similar level to at the beginning. In fact, the current interest rate of the bank is decisive. Many people are in debt here and are looking for the cheapest bank for the remaining debt of their mortgage. Sometimes the entire residual loan can be made considerably cheaper through debt rescheduling, with a new Annuity loans ensure constant rates and are easier for the homeowner to calculate.