Special Repayment: Why You Must Use Your 5% Right

Germany is a country of savers. We love our checking account and our overnight money. But if you have a mortgage, your savings account is probably your biggest enemy. Most German loan contracts include the right to Special Repayment (Sondertilgung) (usually 5% of the original loan amount per year). This right can be a powerful tool to save thousands of euros in interest payments over the life of the loan.

The Problem: "Use It or Lose It"

Unlike a savings account, where you can make up for deposits, the right to special repayment often expires at the end of the year. If you do not make a special repayment in 2024, you cannot deposit this 5% additionally in 2025. The chance is gone. The compound interest effect you could have had is lost forever. This means that if you fail to utilize your special repayment right, you will miss out on the opportunity to reduce your loan balance and save on interest payments.

The Agitation: The Guaranteed Yield

Imagine you have a loan of €300,000 at 4.0% interest. 5% special repayment is €15,000. If you leave this €15,000 in an overnight deposit account at 3.0%, you pay capital gains tax on the profit. Your real return is much lower. If you put the €15,000 into the loan, you save 4.0% interest. That is tax-free. 4.0% tax-free corresponds to a much higher gross yield on the capital market. Can you find a guaranteed, risk-free investment with that yield today? Unlikely. This highlights the importance of utilizing your special repayment right to maximize your savings.

The Solution: Automation

Do not wait until December. Set up a standing order or plan the special repayment firmly into your annual budget (e.g., from the Christmas bonus). The goal is to keep the Remaining Debt at the end of the rate fixation (e.g., after 10 or 15 years) as low as possible to minimize the risk of refinancing at high rates. By automating your special repayment, you can ensure that you do not miss out on this opportunity to save thousands of euros in interest payments.

The Amorti Simulation

Let's calculate the difference.

Open AmortiApp.

Enter your loan (€300,000, 4%, 20 years).

Scenario A: No special repayment. Look at the "Total Interest Payments".

Scenario B: Go to "Extra Payments" and add €5,000 annually (even if it's not the full 5%).

The difference is often shocking. You will see the term shorten by years and you save tens of thousands in interest. Do not give away money to the bank. Use your right.

Benefits of Special Repayment

The benefits of special repayment are numerous. Some of the key advantages include:

Reduced loan balance: By making special repayments, you can reduce your loan balance and save on interest payments.

Lower interest payments: Special repayments can help you save thousands of euros in interest payments over the life of the loan.

Increased equity: By reducing your loan balance, you can increase your equity in your property.

Improved financial flexibility: Special repayments can give you more financial flexibility and options in the future.

Common Mistakes to Avoid

When it comes to special repayment, there are several common mistakes to avoid. Some of these include:

Not utilizing your special repayment right: Failing to make special repayments can result in missed opportunities to save thousands of euros in interest payments.

Not automating your special repayment: Not setting up a standing order or planning your special repayment can result in missed payments and lost savings opportunities.

Not reviewing your loan contract: Not reviewing your loan contract can result in missed opportunities to negotiate better terms or utilize special repayment options.

Conclusion

In conclusion, special repayment is a powerful tool that can help you save thousands of euros in interest payments over the life of your loan. By understanding the benefits and avoiding common mistakes, you can maximize your savings and achieve your financial goals. Remember to utilize your special repayment right, automate your payments, and review your loan contract to ensure you are getting the best possible deal. With the right strategy and discipline, you can save thousands of euros and achieve financial freedom.

Key Takeaways

Some key takeaways to keep in mind include:

Utilize your special repayment right to save thousands of euros in interest payments.

Automate your special repayment to ensure you do not miss out on savings opportunities.

Review your loan contract to negotiate better terms or utilize special repayment options.

Avoid common mistakes such as not utilizing your special repayment right or not automating your payments.

Use tools such as the AmortiApp to calculate the difference and maximize your savings.