When applying for the building loan, an important point is the determination of the repayment. Since the loans have a long term, it is very important to accurately determine the repayment. To do this, it is first necessary to know what types of repayment there are.
Criteria for repayment
Before the method of repayment is determined, various criteria need to be taken into account. These are:
- monthly income
- marital status
- Higher loan interest rates and fixed interest periods
The decisive factor here is the monthly net income. It is usually the same for employees and civil servants. For workers, it depends on the number of hours worked. In order to get a meaningful basis, an average value should be formed. In general, the rule applies, the higher the income, the higher the repayment rate can be.
The repayment should be such that, for example, the loan has only a small remaining debt from the age of 65, or it should be repaid by then. Banks are very careful about age, there are often upper limits up to which loans can still be approved, for example that the loan must be repaid by the age of 70.
The repayment should also take into account the current and possibly future marital status. The number of family members influences the freely available net income. Every household person incurs living expenses. Especially when children live in the household, it has to be taken into account that the needs increase with increasing age of the children. This aspect should be given sufficient consideration when setting the repayment rate.
Amount of loan interest and fixed interest period
The loan amount significantly affects the term of the loan with a fixed repayment amount. The higher the interest rate, the smaller the monthly repayment and vice versa. Especially in periods of high interest rates, many loans are hardly repaid. In contrast, the repayment is significantly higher in periods of low interest rates.
The fixed interest period provides a calculation basis for the repayment. The longer this period, the longer there is absolute interest rate certainty. The rule is that when interest rates are low, the fixed interest period should be as long as possible; if interest rates are high, however, it should be rather short.
An annuity indicates a constant rate. With an annuity loan, the repayment rate (annuity) is always the same, for example 500 dollars. As with any type of repayment, this always consists of two components. These are the interest payments and the repayment.
The special thing about annuity is that these two components develop differently over time. Interest is reduced with each repayment. The pro rata monthly interest is also reduced. Since the annuity always remains the same, the repayment portion increases in line with the fall in interest rates. As a rule, the repayment rate is between 1-3% at the beginning, then increases steadily over time.
The total term of the loan is largely influenced by the respective interest level. In periods of high interest rates, interest rates are well above 7 percent, the repayment portion increases only slightly, the term is therefore very long. Conversely, increases in low interest rates, interest rates are below 4 percent, the repayment share is stronger, the total term of the loan is therefore shorter.
Repayment loans differ from annuity loans in that the rate is not constant, but the repayment portion of the repayment rate is constant. This type of repayment has the advantage that the total term is already fixed when the loan is taken out. It is calculated by dividing the loan amount by the monthly repayment portion.
The total repayment rate also consists of the two components interest and repayment. Both parts are added. Since interest rates can change over time, the credit rate changes accordingly.
Borrowers against high risk, particularly in low interest rates. Interest rates are expected to rise in the future. Depending on how strong these increases are, the situation may arise that the rates can no longer be paid. It is therefore very important that interest rates should be fixed as long as possible in these phases. This has the advantage of planning security.
The situation is reversed in periods of high interest rates. In the future, credit rates are expected to fall here, as interest rates will continue to fall. In periods of constant interest rates, the credit rates remain almost unchanged.
Repayment loans are rather rare in practice. The reason for this is that credit rates can change permanently.
Total loans due
Loans that are fully due have a completely different repayment type. The total repayment is made on a predetermined date. The repayment amount often comes from contracts that fall due on this fixed date. The classic case is the maturity of life insurance. But building loan contracts or other savings contracts can also be used for repayment.
During the term up to the total repayment, the repayment rate consists only of the interest payments. These loans may make sense in certain constellations, but in comparison of the total interest payments they show a higher interest burden. This is due to the fact that no repayment takes place until the replacement date.