Sondertilgung: a Popular but Overrated Option

author image

Chris Mulder

Jun 25, 2020
background image

Who doesn't like the idea of repaying extra on their mortgage to avoid penalties? That is what sondertilgung is, and virtually every mortgage borrower wants it. It is a great sales argument for advisors: if you would use your extra payments/savings/bonuses then you can be done already in year 'X' with your mortgage. 

Then, why is sondertilgung by and large a dead option?

  • First, when interest rates are low you should not repay your mortgage but invest in higher yielding assets like stocks (through cheap well diversified ETFs) or save for a second home to rent out. If you earn 1 percent on repaying your mortgage but can earn 5-7% elsewhere, it typically is not a good idea to repay. Of course you need a long enough time horizon. So for most people under 50-60 I would strongly encourage alternative investments that help them save for their life expectancy of 90+ years. 

  • Second, when interest rates at some point during your mortgage go up considerably, say to 3-4 percent, it becomes a good idea to repay extra on your mortgage. But not using sondertilgung. At that point you should put the money in a bank account--at a fixed term deposit that runs to the end of your fixed interest rate period. The reason is that the bank will pay a higher rate (2-3%) then the interest rate you save on your mortgage (about 1%). When your fixed interest period runs out, you take the money from the bank and use that to reduce your loan size. 

Of course if you have an existing mortgage with a high interest rate, it is a great benefit. But with interest rates more or less at their potential bottom, this wont apply for future mortgages.

Is sondertilgung at the present juncture hence an entirely bad idea? 

No. It does have an interesting potential benefit. If you would have to sell your house before your fixed interest rate period is over (and less than 10 years after getting the mortgage), it does reduce the early departure penalties. As you may know the bank charges you a penalty if they earn less on reinvesting the mortgage money that you repay early. The banks will But have to deduct the potential sondertilgung from the penalty base as they have to assume you use the option.. 

Say you have 5 years left on a mortgage, then a sondertilgung of 5% per year could reduce your average balance for year 6-10 by about 15%.* This would hence reduce your penalty by about 15%. Not much, but still some benefit.

* The precise percentage is not straightforward to calculate. It depends on the extent you have already repaid your mortgage, and is higher than the simple average as it assumes you would pay the sondertilgung as soon as you can each year.

In conclusion: the main benefit of getting sondertilgung on your mortgage in the current low interest environment is that it can save you a bit on the penalty if you sell your house early.  

author image

Chris Mulder

Chris is a former Senior Economist from the World Bank and IMF. He is a Hypofriend Co-founder.

Looking for a mortgage?

Use Hypofriend's affordability calculator to see what you can afford based on your personal situation.

See what I can afford

Use Hypofriend's affordability calculator to see what you can afford based on your personal situation.

Certified by

Covered by

GDPR Standards

EN

 / 

DE

Certified by

Covered by

GDPR Standards

EN

 / 

DE