Repayment suspension
Usually a loan is repaid monthly by the borrower throughout the entire term. With a loan that includes a repayment suspension, the entire loan amount becomes due at the end of the term.
What does repayment suspension mean?
Repayment suspension is a term mainly associated with mortgage financing or with a fixed-rate mortgage. More precisely, this refers to a bullet loan with a repayment substitute. In some cases, financial bottlenecks can occur after a failed relationship or due to job loss, which can also lead to a repayment suspension on an already running loan.
During the repayment suspension, only the due monthly interest is paid for the entire term or for an agreed period. No repayment or amortization of the loan principal in installments takes place during this time. Generally, you have the option to agree on a repayment suspension for most loans. It is often mistakenly assumed that no installments need to be paid during this period; however, the due interest on the borrowed amount must always be paid monthly, even during the repayment suspension period.
Repayment suspension as assistance
By agreeing on a repayment suspension, you simply keep the option open that, if you get into financial difficulties during the loan term, you only have to pay the interest and thereby gain some leeway. The option to apply for a repayment suspension should have been defined in the loan agreement, because only then is a suspension possible.
A repayment suspension for a short period can indeed be a help in serious financial times. However, it should be borne in mind that the term may be extended and thus the cost of the loan may increase. Loans agreed for mortgage financing are annuity loans, which means the installment remains the same over the fixed interest period. Repayment is charged monthly and thus the amounts allocated to interest and principal vary monthly.
If you suspend repayment, you pay the interest that is due after the last accounted repayment for the agreed duration of the repayment suspension. Banks deliberately use the option of repayment suspension in cases of overdue installment payments. In most cases a temporary financial bottleneck can be bridged this way and the loan does not have to be collected through dunning procedures. The enforcement of loan debts is very costly for both parties and is usually only the last resort in case of financial difficulties. If you have prudently agreed on the option of extraordinary repayment in your loan agreement, you can at any time, once the difficulties are overcome, repay the agreed amount additionally within one year.
A repayment suspension on an existing contract due to financial difficulties always requires the bank's consent. If monthly installments are reduced on your own without the bank's approval, you risk the bank terminating the loan.
Repayment suspension in mortgage financing
A repayment suspension can be deliberately agreed from the start in mortgage financing. The borrower always has several options to repay a mortgage. For example, you can pay only interest on the borrowed amount for the entire term. The free capital, the repayment substitute, is then invested in other models and this accumulated capital replaces the loan at the end of the term, leaving the borrower debt-free.
The free financial resources can be invested, for example, in an endowment life insurance policy or in a building savings contract (Bausparvertrag). If the property is owner-occupied and the family's livelihood should also be secured, an endowment life insurance policy is best suited as a repayment substitute.
Another option to consider is investing in a building savings contract. With a building savings contract, you usually save half of the contract sum, and the other half is made available by the building society at a favorable interest rate.
Unlike with life insurance, the sum at the end of the term is clearly defined and deviations are not to be expected. Regardless of which variant is chosen to invest the repayment substitute, it must be ensured that the loan amount is covered at the end of the term.
Life insurance
The life insurance policy or the building savings contract is assigned by the borrower to the mortgage financing for the purpose of loan repayment. This means that in the event of death, the life insurance pays off the loan first and, if a remainder exists, the heir receives it. With an endowment life insurance policy, only the amount accumulated up to the time of death may be paid out; it is generally advisable to additionally protect the family in the event of the main earner's death with a term life insurance policy.
Term life insurance is not expensive, can be taken out with a decreasing insured sum and secures the entire loan amount in the event of death. With term life insurance you do not accumulate capital; the monthly premiums serve solely for insurance coverage.
Additional advantages of repayment suspension
If you need to take out mortgage financing for commercial reasons or for rental properties, the repayment suspension brings further advantages in addition to the points already mentioned. You can look for investors for your construction project and the interest payments can be claimed as tax-deductible advertising expenses.
Another advantage of repayment suspension in property financing lies in the investor return. If the return is higher than the loan interest rate, a financial advantage can develop for the borrower due to the difference effect. This advantage usually only materializes towards the end of the term, and by cleverly investing the financial resources you could completely repay the loan and still retain your own accumulated capital.
For a loan chosen with repayment suspension, regardless of which variant is selected as the repayment substitute, a fixed interest period as long as possible should be agreed. This has the advantage that you do not have to worry for a long time about re-securing the loan amount at possibly higher interest rates.