Sondertilgung or a cash reserve: where should your next €5,000 go?

If your property reserve and household reserve are already full, a special repayment (Sondertilgung) is a sound use of spare cash. On an illustrative €250,000 loan at 4 per cent, €5,000 repaid in year three saves about €1,613 of interest before the fixed rate ends and leaves €6,613 less debt to refinance. If the €5,000 is your reserve, keep it. Money repaid to the bank cannot be drawn back when the apartment needs a repair or stands empty, and the monthly payment does not fall to compensate.

For a rental property, tax narrows the gap further: loan interest is deductible, so part of the interest you save would have come back through your tax return anyway.

A special repayment is a voluntary payment on top of the regular instalment. It is a contractual right, not a general one. During the fixed-rate period (Sollzinsbindung), a borrower with a fixed-rate consumer loan secured on residential property may repay early, in full or in part, only where there is a legitimate interest (§ 500(2) BGB). The lender can then claim early repayment compensation (Vorfälligkeitsentschädigung) (§ 502 BGB). The statutory cap on that compensation does not apply to property loans. In practice, a special-repayment right in the contract is what lets you pay extra without compensation.

What to check in yours:

• Amount. Interhyp reports that lenders usually allow 5 or 10 per cent of the original loan a year, often up to 5 per cent free of charge, with larger allowances available for a surcharge (Interhyp: Sondertilgung). On €250,000, 5 per cent is €12,500 a year.
• Timing and minimums. Many lenders set a fixed date, often in June, and minimum amounts (Interhyp: Sondertilgung).
• Unused allowance. Ask whether an allowance you do not use in one year lapses or carries over.
• Effect. A special repayment shortens the loan's overall term. Under an annuity loan, the monthly payment normally stays the same during the fixed period (Interhyp: annuity loans).

Once the fixed period ends and no new rate has been agreed, you can repay part or all of the remaining debt with one month's notice and without compensation (§ 489(1) BGB). Cash you hold until then can still reduce the refinancing amount.

*Illustrative example. Fictional loan from our repayment-rate guide, not a live offer. Inputs: €250,000 at 4.0 per cent nominal, fixed for 10 years; 2 per cent initial repayment, so €1,250 a month; €5,000 special repayment after the 36th payment, within a free 5 per cent allowance; no fees.*

Figures from a monthly amortisation schedule, rounded to the euro.

The €6,613 reduction in debt has two parts: the €5,000 of principal you repaid and €1,613 of interest you no longer pay. Only the second is a gain. The first is your own money, still yours as equity but no longer cash.

At refinancing, the smaller debt still matters. At an assumed 5 per cent follow-on rate over 20 years, €6,613 less debt means a payment about €44 a month lower.

For a rental apartment, loan interest is generally deductible from rental income; principal repayment is not (§ 9 EStG). A special repayment therefore reduces your deduction as well as your interest bill. See rental property tax benefits in Germany.

At an assumed 40 per cent marginal tax rate, the €1,613 of interest saved would otherwise have reduced your tax by about €645. The net saving is about €968. The lower interest shows up monthly; the smaller tax benefit shows up in each annual assessment.

The alternative is keeping the €5,000 in an instant-access savings account (Tagesgeld). At an assumed 2.0 per cent, credited annually, it earns about €743 over the same seven years. Capital income is taxed at a flat 25 per cent plus solidarity surcharge (§ 32d EStG), but only above the saver's allowance (Sparer-Pauschbetrag) of €1,000 a year per person, or €2,000 for spouses assessed jointly (§ 20(9) EStG). If your allowance is already used, the €743 falls to about €547.

On these assumptions, keeping €5,000 available costs roughly €30 to €60 a year. That is the price of the reserve. For a home you live in, where mortgage interest is not deductible, the gap would be wider, so general "always overpay" advice fits rental property less well.

Three features make a special repayment hard to reverse:

• The money cannot be drawn back. Getting cash out again means new borrowing, if a lender agrees to it.
• The payment does not fall. You still pay €1,250 a month. The benefit arrives as lower debt, not monthly relief.
• Rental costs arrive in lumps. An empty month, a repair inside the unit, a year-end service-charge (Hausgeld) back-payment or a special levy (Sonderumlage) for building works arrive when they arrive.

Illustrative example. Inputs: cold rent €900 a month; operating costs normally recovered from the tenant €210 a month, which the owner pays in full while the apartment is empty; two months' vacancy; a €3,000 repair inside the unit. Total cost: €5,220.

The same €5,000 repayment is sensible in the third column and a problem in the first. There, €5,220 must come from the household reserve, which exists for job loss and illness, or from an overdraft (Dispositionskredit). Compare your bank's overdraft rate with the 4 per cent you saved. The loan payment continues throughout. For the wider test of household income, vacancy and refinancing together, see job loss and mortgage refinancing.

If the apartment is in Berlin, Dresden or Leipzig and you live elsewhere, Alpha Minoris's Vermieter-Autopilot can take the repair report, arrange the tradesperson and coordinate the work on your behalf, within spending approvals agreed in writing. The invoice is still yours: management changes who organises a repair, not who pays for it, so a managed apartment needs a reserve as much as a self-managed one.

A special repayment is a one-off decision you can revisit each year. Raising the repayment rate through a Tilgungssatzwechsel commits more cash every month, and is possible only if the contract includes the option (Interhyp lexicon). The more useful direction is often the reverse: lowering the rate in a difficult year. See 0.1%, 1%, 1.5% or 2% Tilgung.

1. Property reserve at target. Size it from the building's records, not a rule of thumb. Planned works in the owners' meeting minutes or a thin WEG reserve can signal a special levy. See how much money you need to buy a rental property.
2. Household reserve at target. Held separately. A euro can sit in only one reserve.
3. More expensive debt. A consumer or car loan at a higher rate than the mortgage usually comes before a special repayment.
4. Known costs in the next two years. Scheduled building works, a kitchen or bathroom replacement, a possible move.
5. Then choose. Repay if the contract allows it free of charge and lower debt at refinancing matters to you. Keep the cash if flexibility is worth more to you than roughly €30 to €60 a year, and use it to reduce the debt when the fixed period ends.

The tenant's deposit (Mietkaution) belongs to none of these. It is the tenant's money and must be kept separate from your own (§ 551(3) BGB).

If you have not yet bought, these figures belong in the plan before the loan is signed. Alpha Minoris's Buyer's Agent service begins before the property search, with your budget, borrowing capacity and readiness. That is the stage to size both reserves and to decide whether the loan should include a special-repayment right. The lender sets the terms.

Can I make a Sondertilgung at any time?

Only as your contract allows. Outside an agreed right, early repayment of a fixed-rate property loan during the fixed period needs a legitimate interest and can trigger early repayment compensation. When the fixed period ends, you can generally repay without compensation.

Does a Sondertilgung lower my monthly payment?

Usually not. The payment stays the same, the debt falls faster and the term shortens. A change of repayment rate is a separate contractual option.

Is Sondertilgung worth it on a rental property if the interest is tax-deductible?

It can be, but by less than the loan rate suggests. At 4 per cent interest and a 40 per cent marginal rate, the after-tax saving is about 2.4 per cent a year. Compare that with what the cash earns after tax, and what it is worth when a repair arrives.

How large should my reserves be before I make special repayments?

There is no universal figure. Our examples use €6,000 for the property and three months' essential spending for the household. An older building with planned works may need considerably more. Fill both first.