With special repayment, you have the option of repaying the existing residual debt of mortgage lending or a personal loan more quickly. With this form of special payment you can save a lot of money and be debt free earlier. Special repayments are generally made outside the monthly loan repayment installments.
Therefore, there is a special credit-to-credit ratio for an additional service, outside the repayment plan. It pays off in any case, to agree on the possibility of special repayment at the end of the loan.
With a special repayment, you can reduce both the repayment term and the total cost of the loan. In this way, you can use the released funds alternatively.
We have put together all the important information about “special repayment” for you and show you the advantages and disadvantages of this repayment service.
How does special repayment work in practice?
In principle, the special repayment function is such that the borrower transfers a variable amount of money to the lender, in addition to the agreed loan repayment rate.
If you take out a loan, you have to repay the loan amount to the lender in fixed monthly installments. The number of these repayment installments is specified. This results in the so-called repayment term. The use of a loan also incurs certain costs, such as interest, handling fees or other ancillary costs.
The special repayment makes it possible to reduce these total loan costs efficiently: Firstly, the repayment term is shortened and, secondly, the borrowing costs decrease significantly, because the interest accruing on the loan is always based on the residual debt.
The special repayment at a glance:
- Special repayment is a repayment installment that is paid to the lender in addition to the agreed monthly loan installments.
- The special repayment lowers the total cost of credit.
- It reduces the repayment term.
- There is no legal claim to the possibility of special repayment.
In which cases is a special repayment worthwhile?
Investing in a daily or time deposit account is very unprofitable nowadays because interest rates are very low. So if you still pay off a loan and equity left, this should not hoard in an account, but if possible use as a special repayment. In this way, the existing residual debt can be significantly reduced and the total interest burden reduced.
Online there are several special repayment calculators, which you can use to clearly determine how a special repayment would affect your entire financial situation. Special repayment is a very worthwhile investment that can give you the necessary flexibility for your financial planning.
Our tip: Agree on the possibility of special repayment already when the loan is closed. Especially for loans with a long term, such as mortgage lending, this is advisable. Unforeseen situations, such as inheritance or severance pay, can always lead to excess equity. To reduce the current credit and interest charges, a special repayment is always the right choice.
Prepayment Compensation – what is it and how is it calculated?
If you opt for early loan repayments or special repayments, you must know that this will be a loss of profits for the lender. The lender may compensate for the resulting interest loss by means of a so-called prepayment penalty. The amount of the early repayment penalty in individual cases depends largely on the remaining term of the loan.
Furthermore, not every lender charges a prepayment penalty. Whether there is the free option for special repayment, you should ideally check at the time of closing the loan and keep it in the loan agreement. If no prepayment penalty accrues, special repayment is highly recommended.
For example, you can calculate exactly how much money you would have to pay to the lender, despite a prepayment penalty. Here it is important to compare the amount of the prepayment penalty with your savings. If your savings are higher than the amount of the early repayment penalty, a special repayment is definitely worthwhile.
Special repayment within the scope of mortgage lending – what advantages and disadvantages are there?
Basically, a mortgage interest is agreed for mortgage lending for the entire loan term. Special repayments allow the borrower to significantly reduce the interest burden in such a case. A special repayment is thus a very good opportunity to complete the existing mortgage lending faster.
In general, the higher the interest rates for an existing mortgage, the more profitable are special repayments.
Annuity loans are the most widely used loan for mortgage lending in Germany. For this type of loan, the interest rate is set exactly for the entire repayment term. The monthly loan repayment rate consists of an interest portion and a loan repayment portion. Especially at the beginning of the repayment period, the monthly installments consist of a larger share of interest. However, this will decrease over the term of the loan. Special repayment in this case can effectively help to reduce the interest burden and at the same time shorten the term.
The possibility of special repayment must be recorded in writing
A claim for special repayments does not exist according to legal regulation. Nowadays, most lenders grant an annual free special repayment facility of around five percent of the original loan amount. This means that no prepayment penalty is incurred. It is very important to fix the right to free special repayment in writing in the credit agreement. Without a written agreement, the lender will always have the option of claiming a prepayment penalty for his loss of profit.
Five simple steps to special repayment
1.) Make a detailed financial check:
The basis is a detailed income and expenditure account. Make a concise comparison, from which you can easily see where there may be excess funds.
2.) Check the amount of your monthly loan repayment installment:
What is the monthly amount that you repay to the lender for loan repayment? Ideally, the installment should always be around 20 percent of your available funding. So you still have enough money for other expenses.
3.) Determine the amount of possible special repayment:
Based on your remaining earnings, you can determine what the total of a possible special repayment can be. Tip: Never give your complete savings to the special repayment, but always keep a share for unforeseen situations.
4.) Check in concrete terms whether a special repayment is worthwhile:
For this you should read through the loan agreement and the fine print. Does the lender charge a prepayment penalty in the case of a special payment? Or are special unscheduled repayments contractually agreed? In principle, if you have the option of free special repayment, you should also use it if your finances allow it.
Special repayment is also recommended if the savings that you make are higher than any prepayment penalty.
Tip: It’s best to compare the offers from different lenders before you commit. Check not only the APR, ie the total cost of credit, but also special conditions, such as free special repayment possibilities.
5.) Unwind the special repayment:
If you have contracted special repayment, you can also benefit from it. Transfer the amount you can to the lender and effectively reduce the interest burden and reduce your overall credit term.