Extra loan repayments in Germany

Extra loan repayments in Germany yes or no?


Wrong beliefs about extra loan repayments:


With extra loan repayments you save on interest rate payments

With extra loan repayments you become a banker's darling.

With extra loan repayments, you lower the level of debt in the portfolio.

With extra loan repayments, you improve creditworthiness.

During times of low interest rates in the European zone, you should repay as much as possible.


With extra loan repayments you save on interest rate payments.

Although it is technically correct. You will save interest payments and the extra loan repayment. But for someone who is looking to build up a real estate portfolio it is beneficial to run an opportunity cost analysis. For example instead of using the cash for an extra loan repayment you could use that cash for another property transaction. So the more equity you will bring in, the less risk for the bank to lend money. And that usually results in a lower interest rate. So that math is simple how much will I save on the extra loan repayment and how much lower will be my interest rate by bringing in equity.

You will not become the banker's darling through extra loan repayments  

Extra loan repayments mean more work for the bank and a change in the treasury book. Because the maturity profile of your loan and the interest payments will change. And every treasury of a bank prefers planning security with fixed dates and less work. And on top of that the banker would rather prefer that you to use that extra cash for another property financing than through extra loan repayments. More business. More money for the bank. As simple as that.

The extra loan repayment will lower the overall leverage of your real estate portfolio

Extra loan repayments will not deleverage your real estate portfolio. During the duration of the interest fixed period the market value of the property is constant. So for someone who is familiar with accounting knows what I am talking about. To make it simple the calculation would be (cash + market value)/(debt). Now if you use the cash for the extra loan repayment the calculation would be (cash-cash+ market value)/(debt-cash). So based on that calculation an extra loan repayment has no impact at all.

During times of low interest rates in the European zone, you should repay as much as possible.

I cannot follow that logic at all, but I have seen people asking me about it and I respect that. Let’s build a logical case for this. During times of ultra low interest rates and we are talking about 0.75-1% p.a. or even less your monthly interest rate payments are pretty affordable. Number one, every one who understands inflation knows that the value of money in the future is worth less. So the value of your liability decreases over time, but the valuation of your property appreciates over time. So you win double. Second you want to onload as much debt as possible during ultra low interest rates because your monthly payments are low. Use that extra cash and buy more property than to pay off your existing debt because the opportunity cost to refinance at lower interest rates is little. However in times when interest rates are high you should repay more than usual with the intention to refinance at lower interest rates.

In summary you should feel comfortable to have debt against high quality properties with sustainable and predictable rental income. Extra loan repayments will limit your flexibility in scaling your real estate portfolio, reduces your interest tax deductions and lowers available equity.



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