What is an Annuity Loan?
If you are flirting with the purchase of your dream property, you have to pay substantial costs and usually choose long-term financing. The usual way is through a mortgage loan. This can cover up to 80 percent of the construction and property costs. As a rule, a certain variant of the mortgage loan is taken out, namely an annuity loan. Annuity means: “The rate remains the same”, and that is the advantage of this type of loan – you know at the beginning of the financing exactly how much money is to be paid to the mortgage lender by the end of the agreed term.
The repayment increases, the interest portion decreases
The fixed interest rate on an annuity loan is variable or set at four, ten or 20 years. The constant monthly installment is made up of two components: the interest component and the repayment component. Initially, the repayment of the loan is relatively low. However, as the remaining debt shrinks with each payment, the interest portion of the installment decreases and the repayment portion increases. What is the only logical: the higher the repayment, the shorter the term. With low mortgage rates, in particular, experts, therefore, recommend repayment higher than the one percent that is often the norm.
Annuity loan: calculation example
This connection is also an argument for the annuity loan in contrast to some home savings models. A calculation example :
The basis is a financing sum of 100,000 USD and a term of 25 years. The effective interest rate for the first 15 years is 5.01 percent, the monthly charge is USD 623.33. In this annuity loan example, this results in a remaining debt of 43,011.14 USD after 15 years.
With some combination models, almost 60,000 USD remain after the same period. The reason: With the annuity loan, repayment starts immediately, with the home savings variant, the customer only pays the interest on the loan for years, while at the same time the repayment amount is accumulated through a home savings contract.
Advantages and disadvantages of an annuity loan
The advantage of the annuity loan: With a corresponding fixed interest rate, there is a constant monthly charge with precisely calculable residual debt. It is therefore ideal for financing owner-occupied residential property.
The disadvantages: After the rate lock expires, there is a risk of interest rate increases. With variable loans, there is always a risk of rising interest rates – the financial burden of the loan can increase unexpectedly. For the financing of rented Bluebeard, it is usually not the best solution because of the falling interest rate and an increasing repayment component. The reason: the rental income is in most cases constant, while the repayment expenses can increase.
Calculate follow-up financing
After the fixed interest period, which is often 15 years, follow-up financing is required, since the loan amount has not yet been paid in full. In the case of an annuity loan, the subsequent monthly charge depends on the applicable interest rate. The lower it is, the better for the borrower. If the remaining debt of USD 43,011.14 from the above example is to be paid off over ten years, the rates would be around USD 430 per month at a borrowing rate of around four percent.
Note additional costs
When comparing different financing offers, many builders only consider the effective interest as calculated according to legal regulations. However, this effective interest rate does not include all credit costs. In the case of new buildings, in particular, provision interest and partial payment surcharges accrue for the time between the loan approval and the loan payment. At some banks, borrowers also have to pay fees for determining the blue value. Such costs can significantly increase the effective interest rate.
The special form of full-time loan
Just like with the classic annuity loan, the borrower pays a constant monthly rate, which is made up of the interest rate and the repayment component. However, you do not specify the annual repayment rate here, but determine the period after which you want to be debt-free. This specifies the repayment component with which the loan is repaid in full within the specified time.