Explanation of Terms
A fixed loan is a long-term repayment loan for which the borrower only pays interest. The loan itself is only repaid in one amount at the end. This is done either through a life insurance then due or through a fund savings plan. The loan itself has variable interest rates, usually borrowers choose an interest rate fixation between 1 and 30 years. A fixed-rate loan with an agreed variable interest rate can be terminated at any time with three months’ notice. If, on the other hand, a fixed interest period has been agreed, termination is only possible if special repayments have been agreed in advance.
With a fixed-term loan, the borrower pays a monthly interest rate as well as a repayment rate. However, the redemption payment does not go directly to the lending bank, but rather is invested in fixed-income securities, shares or equity funds. The interest payment loan, on which the borrower only pays interest, is used for real estate financing itself. This in turn has the disadvantage that the remaining debt remains constant throughout the term. Only when the investment is paid out in accordance with the maturity will it be used to repay the loan. If the investment can show positive long-term performance, there may well be an excess of assets. However, this rarely takes place.
Fixed loan against repayment suspension
If you use your property as an investment and do not live in it yourself, the deductibility of interest from real estate financing can benefit considerably from the tax benefits. This is because life insurance, in particular, will initially be saved by taking advantage of the tax benefits and will then be used to repay the fixed loan. But be careful: A fixed-rate loan is not a fixed-rate loan – a distinction must be made here. In many cases, fixed-rate loans are still mistaken for a fixed-rate mortgage! With this form of financing, the term “fixed” means that the entire loan must be repaid on a predetermined date. For this, the repayment of the fixed loan is suspended even for the period until the final due date.
Borrowers are therefore obliged to ensure that the repayment of the fixed loan to the lending financial institution is always ensured in an appropriate manner. As a rule, this is done by assigning claims from life insurance. In addition to taking out life insurance, a savings contract or a home loan can also be included. Since the income from life insurance may not be guaranteed, the calculation of the profit shares in the expected transfer amount for the fixed loan can lead to a severe loss. Remedial action can only be taken by those who only adjust the loan amount to the guaranteed expiry amount of their life insurance. But then again, the fixed loan against repayment suspension is no longer a good option.
Before concluding the contract, borrowers should ensure that the bank offers them an interest-free period for the loan provision, in many cases there is a period of up to 15 months. In order for an early loan repayment to be possible, the borrower should ensure that this is made possible by a small interest premium. Protection against early repayment should also be agreed in the event of a job-related move or in the event of a certain hardship.
If you want to avoid serious mistakes here, you should definitely consult an experienced tax advisor. The conditions of the different banks also vary greatly among themselves. If you do not compare here, a final repayment does not always result in the desired freedom from debt. Because with fixed-rate loans in particular, it is of the utmost importance that an investment form is selected that is also provided with an increase in value, so that in the end there is also an asset surplus.
The advantages and disadvantages of a fixed loan
The advantages of a fixed loan lie in the tax savings, because with a correspondingly long fixed interest rate, there is not only a constant monthly charge from interest that can be claimed for tax purposes, but also the insurance contributions. Since the fixed interest rate expires at any point in time for a fixed-rate loan, the borrower has to accept a corresponding risk of an increase in interest rates. This risk is much higher than with an annuity loan. Since the loan is repaid in full by a life insurance policy at the end of the agreed term, there is also the risk that the originally calculated maturity benefit from this life insurance policy will not be sufficient to cover the loan. The reason for this is the further fall in the guaranteed interest rate.
If variable interest rates were then agreed for the fixed loan, the borrower has another problem with rising interest rates; he then has to accept a higher burden accordingly. So if you finance your own property, you should not necessarily rely on repayment-free loans. There are far better solutions here. Only investors who want to take full advantage of the tax benefits of a real estate investment will find an optimal option with the fixed loan. The fixed loan itself also offers advantages, because it is not only part of the tax-deductible part of the financing, but also offers the borrower a constant, calculable interest payment. If it is instead a construction loan with a regular repayment, the proportion of interest that the property owner can deduct from his rental income for tax purposes will decrease permanently.
So that the interest rate on a fixed loan does not increase after the fixed interest period has expired, it should be contractually agreed that the interest rate remains the same throughout the term of the loan. This in turn has a disadvantage in the case of long terms, because here the interest rate is correspondingly higher than for short terms. In the event that life insurance develops adversely and the residual debt does not have to be paid by the borrower out of his own pocket, the borrower should form an additional cushion in order to be able to repay the debt in the event of a negative performance of the investment. Under no circumstances should you rely solely on the expiry payment of an insurance policy. This is the only way to avoid expensive refinancing.