Principal Repayment (Tilgung)

What it is

The Tilgung (principal repayment) is the repayment of the original loan amount (also Kreditvaluta or Nominalbetrag) to the lender. It must be kept strictly separate from the interest expense, which is the price paid for the use of capital. Each loan instalment consists partly of principal and partly of interest — the mix shifts over time.

In practice — particularly with mortgage loans and consumer loans — several established repayment structures exist, each with a different cash-flow profile and total cost.

Repayment structures compared

Annuity repayment — by far the most common in Austria and Germany. The monthly instalment stays constant throughout the fixed-rate period. Over time the interest share declines (because the residual debt shrinks), while the principal share rises correspondingly. Advantage: maximum predictability. Disadvantage: the burden stays constant even when inflation rises.

Straight-line (Ratentilgung) — a constant principal share with linearly declining interest. The total instalment is high at first and tapers off. Rarely offered today, it was once common in municipal lending.

Bullet loan (endfälliges Darlehen) — only interest is paid during the term; the full principal is repaid at maturity in a single payment. Typical in corporate finance, or combined with a repayment vehicle (building-society contract, life insurance, ETF savings plan).

Building-society loan (Bauspardarlehen) — a hybrid of savings and loan phase, with fixed instalments and a fixed rate over the entire term.

Extra repayment and early termination

Consumer loans in Austria can be repaid in full or in part at any time under the Verbraucherkreditgesetz (VKrG). The bank may charge an early-repayment fee, typically 1% of the amount repaid early on fixed-rate loans — capped by the HIKrG for mortgages at the actual loss the bank suffers from reinvesting at worse conditions.

Example: on a €200,000 mortgage with a 5-year fixed rate at 4%, an extra repayment of €30,000 after two years can trigger a prepayment penalty of €300-€1,200, depending on the bank's refinancing rate at the repayment date.

The maths of accelerated repayment

A useful rule of thumb: raising the annual principal repayment rate from 1.5% to 2.5% roughly halves the total term — from about 35 years to about 22 — at a constant 4% interest rate. The monthly instalment rises accordingly (from €917 to €1,083 on a €200,000 loan), but the total interest paid falls dramatically.