The full amortization loan is a marginal phenomenon in construction financing. The annuity loan is the most popular type of loan. With an annuity loan, you conclude a construction financing contract with an interest-linked term. This means that during the contractually fixed term, the interest rate remains the same and is not exposed to interest rate fluctuations that occur during the term. An annuity loan offers planning security during this term because the monthly installments to be paid to the bank remain constant. On average, annuity loans with a term of just under 13 years are concluded in germany.
But in most cases, this period is not long enough to repay the entire loan. As a result, once the initial financing has expired, there is a residual debt that has to be financed directly afterwards with a second loan. The risk of this follow-up financing: the interest rate then offered can be much higher and thus make the overall financing more expensive. To avoid this interest rate risk in the future, construction financing banks offer the full amortization loan. This type of loan is concluded with a fixed interest rate over the entire period until the total amount of the loan has been repaid in full.
Full repayment loans – finance without the risk of rising interest rates
A fully amortizing loan is a decision for the greatest possible security and is the best protection against possible interest rate increases in the future. With a full amortization loan, the borrower speculates that the interest rate level will have increased in 10, 15 or 20 years. This is how you protect yourself from interest rate jumps. This provides planning security, as the same installment – consisting of interest payment and repayment of principal – is always transferred to the bank every month over the entire term until the loan is finally cleared of debt. In this respect, a fully amortized loan is an option in times of low interest rates.
Full repayment loans cost more than contracts with a short fixed interest period
In principle, the interest rates payable for construction financing contracts with a long fixed interest rate are always higher than the interest rates offered for short terms. With these higher interest rates, the bank protects itself against a loss of income.
Particularly in a low-interest phase, a full repayment loan is a good option with special security, despite the higher interest rates. However, it should be borne in mind that a low interest rate fixed over a long period of time is only one factor in secure construction financing. Rather, the term and repayment play an important role. Because these two factors determine the amount of the monthly rate. The shorter the term, the higher the monthly installment. And banks are eager to conclude fully amortized loans with short terms.
Typical terms of fully amortized loans range from 15 to 20 years. In addition, the flexible elements of a fully amortized loan are often limited: rate adjustments during the term and extended special repayment options are generally restricted compared to a classic annuity loan. Most banks also charge an early repayment fee for a fully amortized loan if you want to repay part of the remaining debt early.
A comparison of providers is important for a fully amortized loan
Many banks charge a higher interest rate for a full repayment. Depending on the term, interest surcharges of over one percent are not uncommon. But it is also possible that banks will grant interest rate discounts on a fully amortized loan with a high initial repayment and a correspondingly shorter term compared to an annuity loan. Especially if the security and creditworthiness of the prospective borrower is very good.
If you are interested in a fully amortized loan, it is important to sound out the market carefully and obtain offers from various banks. In addition, you should consider the individual design of the contract – especially repayment and term. And at the same time consider what monthly rate is within the bounds of what is feasible in order to be able to service it securely.
Negotiating unscheduled repayment options for a fully amortized loan
Especially important with long-term loans is an option for special repayment. Because this ensures that over time, with special repayments, you can be debt free faster. Currently, there are only a few banks that offer special repayment rights for full repayment loans.
It is helpful to have the support of bank-independent construction financing brokers such as accedo AG, which has an up-to-date overview of all construction financing offers from over 400 banks. Due to the very long terms of a full redemption, there is always the possibility that one can record additional income. It is often advisable to invest these additional financial possibilities directly in the repayment of a loan, because in this way one is free of debt even faster. That's why the option of special repayment is actually a building block of the most favorable full repayment financing possible.
Conclusion: advantages of a fully amortized loan
Over the entire term. In times of low interest rates, the advantage of not having to take out follow-up financing with possibly higher interest rates is interesting.
- No interest rate risk and the greatest possible financial planning certainty. Know the monthly rate they will pay for the entire term of the contract.
- You have no expense and no need to worry about prolongation or follow-on financing.
For your own financial planning, a full redemption loan offers the best prerequisites to cover the next few years or years. Decades to plan with full certainty. Especially for young families, who will face new financial challenges down the road, such as z. B. If the children's education, the provision for one's own parents or a strategic accumulation of assets for old age are to come, a full repayment is a good option within the construction financing.
Conclusion: disadvantages of a full amortization loan
- No change of bank possible during the entire term, for example if other banks offer better conditions during the loan term.
- In the event of default and suspension of installments, the bank demands a high level of compensation. For this reason, you must be clear in advance and before contacting a bank about your own monthly options for the installment payment in the future.
- Many banks do not offer any special repayment options. And if flexible special repayment options are offered, they are often relatively expensive. Rate adjustments during the term and other flexible components are usually not possible either.
- Little flexibility in how the contract is structured. Contractual components such as interest or amortization can usually not be adjusted during the term of the contract. Not to be changed.
For your safety: get expert advice
You should seek comprehensive advice before making a decision, because there are other alternatives with similar planning reliability. In addition, full amortization loan offers vary significantly; both in terms of interest rate and contract design. Nevertheless, a fully amortized loan may be an option – especially if you can make higher monthly payments to keep the term relatively short. Then, in total, a full amortization loan can sometimes be even cheaper than an annuity loan. Since accedo AG is informed daily about the construction financing offers of more than 400 banks, one can plan the best possible construction financing with maximum security together with the personal advisor.
Using a loan to manage the entire financing at favorable interest rates is a good idea, but it also has disadvantages.