Finance
Tilgung
Principal repayment rate - percentage of loan repaid annually
- Last updated:
- Editorially reviewed
Tilgung, or principal repayment, is a fundamental concept in German mortgage financing that directly impacts your cashflow, equity buildup, and total interest costs. Choosing the right Tilgung rate is one of the most important decisions a real estate investor makes, balancing monthly payment affordability against long-term wealth building.
How Tilgung Works in the German Annuity Mortgage
In the German annuity mortgage (Annuitätendarlehen), the form most property loans take, the Tilgung rate determines how quickly you repay the loan principal. At the start of the loan, the monthly payment consists mostly of interest (Zinsen) and a small amount of Tilgung. Over time, as the outstanding principal decreases, the interest portion shrinks and the Tilgung portion grows, while the total monthly payment remains constant. This is how the annuity structure differs from interest-only mortgages.
- The initial Tilgung rate (Anfangstilgung) determines the starting repayment speed
- Monthly payment = Zinsen (interest on remaining balance) + Tilgung (principal repayment)
- As principal decreases, the Tilgung share of the fixed monthly payment automatically increases
- At 3.5% interest, a 2% initial Tilgung grows to about 3.4% of the original loan per year after 15 years and about 4% after 20 years
- The Verbraucherzentrale recommends an initial Tilgung of at least 2%, ideally more
Choosing the Right Tilgung Rate as an Investor
The Tilgung rate represents a trade-off between monthly cashflow and long-term equity buildup. A higher Tilgung rate means faster debt reduction and lower total interest paid over the loan's lifetime, but it increases your monthly payment and reduces cashflow. A lower Tilgung rate preserves cashflow but leaves a higher balance at refinancing. This decision should be made deliberately, understanding the long-term financial implications.
- 1% Tilgung: Lowest monthly payment, maximizes cashflow, but the loan takes about 43 years to repay at 3.5% interest and total interest is very high
- 2% Tilgung: The minimum the Verbraucherzentrale recommends; at 3.5% interest the loan is repaid in about 29 years
- 3% Tilgung: Faster equity buildup, significantly lower total interest, loan repaid in about 22 years at 3.5% interest, but higher monthly payment
- Sondertilgung (special repayment): The Verbraucherzentrale recommends agreeing special repayments of 5 or 10% of the loan per year
The Impact of Tilgung Rate on Total Interest Costs
The difference in total interest paid over the life of a loan between a 1% and 3% Tilgung rate is large. Higher Tilgung rates reduce the outstanding principal faster, which means less interest accrues each year. Understanding this relationship helps investors balance short-term cashflow needs against long-term profitability.
- At 3.5% interest, a 1% Tilgung on €250,000 generates approximately €234,000 in total interest over the life of the loan
- The same loan at 3% Tilgung generates approximately €110,000 in total interest, saving about €125,000
- Higher Tilgung also means faster equity buildup, improving your loan-to-value ratio for future refinancing
Frequently Asked Questions
What is the minimum Tilgung rate required by German banks?
Each bank sets its own minimum initial Tilgung rate in its lending terms. The minimum is not always the best choice: the Verbraucherzentrale recommends at least 2% initial Tilgung, ideally more, so that the balance is lower when the fixed-rate period (Zinsbindung) ends and interest rates may be higher.
Can I change my Tilgung rate during the loan term?
This depends on your mortgage contract. Many German banks offer a Tilgungssatzwechsel (Tilgung rate change) option that lets you adjust the rate during the fixed-rate period. This flexibility is valuable for investment property owners whose rental income may change. The Verbraucherzentrale recommends agreeing the right to change the Tilgung rate several times during the term. Check for this option when comparing mortgage offers and request it explicitly if it is not included in the standard terms.
How does Tilgung affect my tax deductions as a property investor?
Tilgung payments themselves are not tax-deductible in Germany; only the interest (Zinsen) portion of your mortgage payment is deductible as Werbungskosten (income-related expenses) for investment properties. This means a higher Tilgung rate effectively reduces your tax deductions because less of your total payment is interest. However, this is not a reason to choose a low Tilgung rate purely for tax benefits, as the interest saved through faster repayment typically outweighs the lost tax deduction. Consult a Steuerberater (tax advisor) to model your specific situation.