German Mortgage Amortization: Here’s How It Works

Are you about to take out a mortgage and feeling a bit lost with all the different amortization options? Don’t worry, it’s a common feeling! Among French amortization, Italian amortization, there’s also German amortization: what is it exactly, and why should you consider it? The short answer is that German amortization could be the key to optimizing your mortgage and saving on interest in the long run.

While French amortization is the undisputed king of the Italian market, German amortization presents itself as a viable alternative, often underrated but with significant advantages. Imagine being able to reduce the total cost of your mortgage while keeping constant payments for most of the loan term. Sounds interesting, right? German amortization works just like that: a smart system that gets ahead of the interest, allowing you to repay the principal more efficiently and contain the overall expense.

In this comprehensive guide, I will walk you through the discovery of German amortization in a clear and detailed way. Forget incomprehensible jargon and complicated formulas! I will explain how this system really works, what its pros and cons are compared to French amortization and Italian amortization, and most importantly, I will help you understand if German amortization is the right choice for your mortgage. Get ready to become an expert on German amortization and make more informed financial decisions for your future! Keep reading to discover all the secrets of this alternative and potentially advantageous repayment system!

German Amortization: What Is It and How Does It Work?

German amortization, also known as a “constant payment amortization plan,” is a mortgage repayment system characterized by a unique structure in the calculation and composition of its payments. Unlike French amortization, where the interest portion is calculated in arrears, in German amortization, the interest is paid in advance of the principal portion.

But what does this mean in practice?

Imagine taking out a mortgage with German amortization. The first payment you make will consist exclusively of interest. This is because, in the German system, the interest for the first amortization period is paid immediately at the beginning of the repayment plan. The subsequent payments, however, will be composed of both an interest portion and a principal portion, with the unique feature that the interest portion is calculated on the remaining principal *after* deducting the principal portion that will be repaid with that same payment.

In summary, here are the key points of how German amortization works:

• Upfront interest payment: The first payment consists only of interest.
• Constant payments (from the second payment onward): Starting from the second payment, the payment amount remains constant for the entire mortgage term (unless the interest rate changes in the case of a variable-rate mortgage).
• Decreasing interest portion: The interest portion within the payment gradually decreases over time because it is calculated on the remaining principal, which reduces with each repayment.
• Increasing principal portion: Consequently, the principal portion within the payment gradually increases over time.

Why “German”?

This amortization system has its origins and is widely used in Germany, hence the name “German amortization.” Although less common in Italy, it represents a viable alternative to French and Italian amortization, with specific advantages that we will analyze in detail.

German vs. French and Italian Amortization: What Are the Differences?

To fully understand German amortization, it is essential to compare it with the most common amortization systems in Italy: French and Italian. Let’s analyze the main differences in terms of payment structure, total mortgage cost, and the trend of the remaining principal.

French Amortization (the most common in Italy):

• Constant payments: The monthly payment amount remains fixed for the entire mortgage term (with a fixed rate).
• Interest portion high at first, then decreasing: In the first payments, the interest portion is predominant over the principal portion. Subsequently, as the principal is progressively repaid, the interest portion decreases and the principal portion increases, while the payment remains constant.
• Interest calculated in arrears: Interest is calculated on the remaining principal at the beginning of each amortization period.

Italian Amortization:

• Constant principal portion: Each payment includes a fixed principal portion, calculated by dividing the total mortgage amount by the number of payments.
• Decreasing payments: The total payment decreases over time, as the interest portion, calculated on the progressively decreasing remaining principal, also reduces.
• Interest calculated in arrears: As with French amortization, interest is calculated on the remaining principal at the beginning of each period.

Comparison Table: German vs. French vs. Italian Amortization

In summary:

• German amortization is distinguished by the upfront payment of interest and constant payments (from the second payment onward), with a decreasing interest portion and an increasing principal portion.
• French amortization is characterized by constant payments and interest paid in arrears, with an initially predominant interest portion.
• Italian amortization involves constant principal portions and decreasing payments, with interest paid in arrears.

Pros and Cons of German Amortization

Like any amortization system, the German method has pros and cons that are important to evaluate carefully to understand if it is the right choice for your mortgage.

Pros:

• Potentially lower total interest cost: Thanks to the upfront interest payment mechanism, German amortization can lead to slight savings on the total cost of interest compared to French amortization, especially for longer mortgage terms. This advantage comes from the fact that interest is calculated on a remaining principal that decreases more quickly, as the first payment immediately contributes to reducing the debt (even if only for the interest portion).
• Constant payments (from the second payment): The consistency of the payments (from the second one onward) can facilitate family financial planning, as the monthly amount to be paid for most of the mortgage term is known with certainty. This can be reassuring for those who prefer predictable expenses.
• Transparency in payment composition: The structure of German amortization, with its upfront interest payment, may be perceived as more transparent than French amortization, where the split between the interest and principal portions in the initial payments can seem less intuitive.

Cons:

• High first payment (interest-only): The first payment, consisting exclusively of interest, can be higher than the first payment of a mortgage with French or Italian amortization, especially for large mortgage amounts. This could be an obstacle for those with a limited initial repayment capacity.
• Less flexibility in case of early repayment: Although the total interest cost may be lower, in the case of early mortgage repayment in the first few years, the financial advantage over French amortization could be less significant. This is because the largest interest portion is paid in the early installments.
• Limited availability: German amortization is less common in Italy than French amortization. Consequently, it might be more difficult to find banks that offer this type of repayment plan, and the choice could be more limited.

When Is It a Good Idea to Choose German Amortization?

German amortization can be an interesting choice in specific situations, based on your needs and financial priorities.

Situations where German amortization can be advantageous:

• High initial repayment capacity: If you have a solid financial situation and can handle a higher first payment (consisting only of interest), German amortization can allow you to save on total interest in the long run.
• Long-term horizon: The advantage in terms of savings on interest tends to grow with the duration of the mortgage. Therefore, if you plan to keep the mortgage for an extended period, German amortization may be more convenient than other options.
• Preference for constant payments (from the second payment): The predictability of constant payments (from the second one onward) can be an important factor for those who want greater stability in managing their family budget and prefer to know the exact monthly amount to pay for most of the mortgage term.

Situations where German amortization might be less suitable:

• Limited initial repayment capacity: If you have a more modest initial repayment capacity, the high first payment of German amortization could be an obstacle. In this case, it might be better to opt for French or Italian amortization, which have lower initial payments.
• Intention to repay the mortgage early: If you plan to repay the mortgage early in a short time frame, the interest savings offered by German amortization compared to French amortization might be smaller and less significant.
• Difficulty finding offers: Due to the lower prevalence of German amortization in Italy, the choice of banks offering this option may be limited.

How to Calculate a German Amortization Plan: A Practical Example

To better understand how German amortization works, let’s analyze a practical example of an amortization plan calculation.

Let’s assume a mortgage with the following characteristics:

• Mortgage amount: €150,000
• Term: 20 years (240 monthly payments)
• Annual interest rate (TAN): 3%

Calculation of the constant payment (from the second payment onward):

The formula for calculating the constant payment in German amortization is slightly more complex than in French amortization, as it accounts for the upfront payment of interest. However, to simplify, we can use specific online calculators for German amortization, easily found on the web, which will provide us with the complete amortization schedule.

Alternatively, we can use a spreadsheet (Excel, Google Sheets) by setting up the following formulas:

1. Constant monthly principal portion: = Mortgage amount / Number of payments
   • In our example: €150,000 / 240 payments = €625
2. First payment interest: = Mortgage amount * Monthly interest rate
   • Monthly interest rate: 3% annual / 12 months = 0.25% monthly
   • First payment interest: €150,000 * 0.25% = €375
3. First payment amount: = First payment interest
   • First payment amount: €375
4. Interest for subsequent payments (from the 2nd month onward): = Previous month’s remaining principal * Monthly interest rate
5. Payment for subsequent payments (from the 2nd month onward): = Constant principal portion + Current payment’s interest

Amortization Schedule (First 5 Payments):

Analysis of the example:

• The first payment is only €375, consisting solely of interest.
• The subsequent payments (from the second to the 240th) are around €990-€620, with a slight decrease over time due to the reduction of the interest portion.
• The remaining principal steadily decreases with each payment, until the mortgage is fully paid off with the 240th payment.

This simplified example illustrates the basic mechanism of German amortization. For precise calculations and detailed amortization schedules, it is always advisable to use online calculators or request a simulation from your bank.

German Amortization in Italy: Prevalence and Offers

As mentioned, German amortization is less common in Italy than French amortization, which is the market standard for mortgages. Consequently, the supply of mortgages with German amortization is more limited, and not all banks offer this option.

Why is it less common?

There are several reasons for the lower prevalence of German amortization in Italy:

• Habit and tradition: French amortization has established itself over time as the market standard, creating a sort of “habit” among both banks and consumers.
• Perceived greater simplicity: French amortization, with its constant payments for the entire term (at a fixed rate), may be perceived as simpler and easier to understand than German amortization, even though the latter actually has an equally straightforward structure.
• Banks’ preference for French amortization: Some banks may prefer French amortization as, overall, it can generate a slightly higher interest margin in the long run, although the difference is not always significant.

Where to find mortgage offers with German amortization?

Despite its lower prevalence, some banks in Italy do offer the option to choose German amortization for a mortgage. These may include:

• Online and digital banks: Some online and digital banks, which are more innovative and attentive to the needs of diversifying their offerings, might propose German amortization as an alternative option.
• Banks of German origin or with a strong international presence: Banks with roots or connections to the German market may be more inclined to offer this type of amortization, in line with the tradition of their country of origin.
• Local banks and credit unions: In some cases, even local banks and credit unions might offer German amortization, especially in geographical areas with greater influence from or interchange with Germany.

How to search for offers:

To find mortgage offers with German amortization, it is advisable to:

• Consult online mortgage comparison sites: Use online comparison tools, specifying a preference for German amortization in the search filters.
• Contact banks directly: Check directly with the banks you are interested in to see if they offer German amortization, even if it is not explicitly advertised.
• Consult a mortgage broker: A mortgage broker can support you in the search for the best mortgage deals, including checking the availability of German amortization at various banks.

Conclusions

German amortization represents an interesting option in the landscape of mortgages, although it is less known and less common in Italy compared to the ubiquitous French amortization. Its uniqueness lies in the mechanism of upfront interest payment, which, despite involving a more burdensome first payment, can translate into savings on the total cost of the loan, especially for longer terms.

The choice between German amortization and other systems, like French or Italian, is not one-size-fits-all, and there is no universally best solution. The decision depends on a careful assessment of your financial needs, your initial repayment capacity, the time horizon of the mortgage, and your risk appetite.

While German amortization may attract those who are particularly sensitive to the total cost of the mortgage and are looking for potential savings on interest in the long run, the higher first payment could be a deterrent for those with less initial financial availability. Furthermore, the lower prevalence of this type of amortization in Italy could limit the choice of available offers and banks.

Ultimately, German amortization deserves to be considered as a viable alternative, especially for those who:

• Have a solid financial situation and can handle a higher first payment.
• Intend to take out a long-term mortgage.
• Prioritize savings on the total cost of interest.
• Appreciate the consistency of payments (from the second one onward) for better financial planning.

However, it is essential to carefully compare available mortgage offers, simulate different amortization plans (German, French, Italian), and evaluate your own financial profile and priorities before making a final decision. Consulting a financial advisor or a mortgage broker can be helpful for navigating the complex world of mortgages with confidence and identifying the most advantageous and suitable solution for your specific needs.

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