Annuity loan what is it?

If it is about the construction of a house, the purchase of a condominium or other expensive purchases, many people use a loan to be able to realize the desired construction financing. In most cases this is a so-called annuity loan. But although this form of credit is very popular in this country, not all borrowers know by far what annuity means and how an annuity loan works exactly.

The term annuity derives from the Latin word annuus (annually, every year) and is used in today's financial world to refer to the constant annual installments of an amortizing loan. So, simply put, an annuity loan is a special type of loan with constant loan installments that remain the same over the agreed period of fixed interest rates. The borrower not only benefits from a well predictable monthly burden, but also hedges against rising interest rates. Due to this solid calculation and the high flexibility, this type of financing has become one of the most used for properties.

How does the annuity loan work?

A couple signs up for an annuity loan

Loan payments on an annuity loan are made up of an interest portion and a principal portion. The borrower repays a portion of the loan with each installment, reducing his remaining debt. Since the interest is always calculated on the remaining debt, over time thus also the interest rate decreases. From the fact that the total loan rate remains constant, it follows: As the term of the loan progresses, the repayment portion increases continuously, while the interest portion becomes smaller.

An annuity loan is concluded with a fixed interest period, which can be between 5 and 30 years and during which the amount of the loan installments does not change. Since after this phase the building loan is however usually not yet completely repaid, a loan extension in the form of a so-called follow-up financing becomes necessary. What this follow-up financing looks like and whether a forward loan is possible, for example, depends on various factors. It is therefore advisable to find out about the options for follow-up financing at an early stage.

What are the advantages and disadvantages of an annuity loan??

In addition to the constant installments of the annuity loan, which offer the borrower good planning security, the borrower also has the option of paying his installments to the bank on a monthly, semi-annual or annual basis. In addition, an annuity loan offers other advantages and also disadvantages, which should not remain unmentioned.

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