Frequently Asked Questions
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An annuity loan is a loan with periodic repayment amounts that remain the same, so called instalments - provided that an interest commitment period has been agreed for the entire term.
German Tax & Real Estate
Under German law, all rental income earned in Germany is subject to income tax. The basis of assessment for calculating the tax burden is the "taxable income". In the case of a real estate investment, this is usually calculated from the rent earned less the investment costs. These investment costs also include, for example, the costs for a loan - i.e. the interest paid to the lender. Moreover, an annual depreciation of 2% of the purchase price can be deducted from the pre-tax income to determine the "taxable income". However, all these tax optimisations can only be made use of, if the purpose of investment is to generate earnings for instance through renting out the apartment.
Effective Annual Rate
The Effective Annual Rate (EAR) is the amount of interest paid on an investment. It includes several additional costs, for example the frequency of interest calculation. If interest is calculated more often, it accrues to a higher amount and therefore increases the costs that you will have to pay.
The loan term is the period over which a loan contract is in force. The loan is either repaid before or at the end of its term, or a new loan agreement is negotiated.
The principal repayment is the part of the instalment that decreases your level of debt. It is generally determined by the repayment rate. The higher the repayment rate, the higher each principal repayment. Hence, the faster your loan will be
Stated Annual Rate
The stated annual rate (SAR) for a loan is the pure interest of the loan, without taking other incidental costs into account. An important factor for the amount of the stated annual rate is the duration of the interest commitment. The longer the interest rate is fixed, the greater is your planning reliability, but the higher is the stated annual rate.
An annuity is defined as the annual amount paid to the lender and depends on the interest rate and the repayment rate. Therefore, the amount paid to the lender consists partly of interest and partly principal repayment. The regular instalment amount can be calculated by dividing the annuity by the instalment frequency. While repaying a small part of the loan with each instalment, interest decreases over time vis-à-vis the remaining debt. Hence, as the annuity remains unchanged, the proportion of principal
European Standardised Information Sheet (ESIS)
The Regulation requires mortgage sellers to provide the customer with a European Standardised Information Sheet (ESIS), in which the key features and risks of the mortgage contract are disclosed to the customer before contract closure. The form of that information sheet is standardised to allow customers to easily compare mortgage loan offers of different sellers.
Loan To Value
The loan-to-value ratio is a percentage that reflects the ratio between your loan and the value of your property. Note that the value of your property depends on the bank's evaluation and not necessarily on the purchase price.
Net Loan Amount
The net loan amount is the disbursement amount that a borrower receives.
A special repayment (also unscheduled repayment) is a one-off payment outside the agreed monthly instalments for the repayment of a loan. A special repayment allows you to repay an amount agreed in the loan agreement to the bank each year. This reduces the residual debt of your mortgage loan and therefore shortens the length of the repayment period as well as lowering interest costs.
Variable Interest Rate
A variable interest rate is a rate that is subject to periodic changes. These rate changes are linked back to a benchmark interest rate known as an index. In the case of mortgage loans that index consists of the local base rate plus a fix margin. The base rate represents the lender's refinancing costs. The margin represents the lender's compensation for the risk of lending money.
Debt-financing is a smart way to increase both net and gross profit of a real estate investment. Using annual depreciation and costs of credit one can drive down the taxable income to practically zero. These tax-neutral returns, i.e. tax optimised rental earnings, will then be used to pay back the
Fixed Interest Rate
A fixed interest rate remains the same for the entire term of the loan, making long-term budgeting easier.
A loan agreement is an agreement between a credit institution and a borrower on the granting of a specific loan. In Germany, a loan agreement between a credit institution and a customer is heavily regulated. Besides specifying loan terms, it is meant to inform customers about their rights and.
Interest is the cost of credit, i.e. the regular cost to be paid to the lender. It is generally expressed in percent per year. The effective annual rate is the percentage interest rate on the outstanding debt that already incorporates compounding and repayment frequency as well as other costs associated with the loan.
The instalment is a regular repayment consisting of principal and interest.
Is the annual percentage of the mortgage that is being paid back. This is slightly different to other countries, where the contractually agreed term determines the annual repayment to ensure full repayment of the loan over the agreed time period. In Germany you can select how big your repayment rate is going to be per year (generally between 1%-5% of the net loan amount per year). That usually leaves a residual debt at the end of the loan term which needs to be refinanced.