It doesn’t necessarily have to be a conventional annuity loan to finance a property. You can also combine a non-amortizing construction loan with a stock fund savings plan. On paper, this may seem lucrative, but the risks can be considerable.

How does the combination of a real estate loan and a fund savings plan work? When combining an annuity loan with a fund savings plan for real estate financing, one hopes for a lucrative „interest differential transaction“. Such a transaction is not uncommon in the context of loans.

This means: the (nominal) interest rates of the construction loan are (significantly) lower until its maturity, compared to the (average) return of the fund. The difference, converted into euros and cents, goes into the pockets of the builder or property buyer and can be used for whatever they desire. Let’s look at this „interest differential“ in a concrete example.

If someone takes out a real estate loan with a 30-year fixed interest rate at the moment (around mid-February 2024), they will pay about 3.7% nominal interest, around 3.8% effective. Sounds good, is good. Because just a few months ago, a comparable construction loan cost almost 5%. That means a yearly savings of around 3,000 euros, or 250 euros per month, for a loan amount of 300,000 euros.

Annuity loan: amortization increases, interest decreases The monthly installments, which are the same until the end of the fixed interest period, consist of an interest and an amortization portion. With each monthly installment, the proportion of interest decreases in favor of amortization. As larger amounts are repaid in the last few years until the loan’s maturity, the amortization gains increasing momentum.

If there haven’t been any significant changes to the credit rules in the meantime – such as interest deferrals or reductions in the annual amortization rate – the property in our example will be debt-free after 30 years. The owner will then, in all experience, have a considerable asset. But usually, no extra money.

But this extra money, which can easily amount to a five-digit euro amount, is what borrowers hope for by combining their construction loan with a stock fund savings plan.

How profitable can stock investments be? Listed company investments, also known as stocks, are considered the most profitable form of investment. Under two important conditions: the investor must have patience and time – at least ten years, preferably twice as much. And they should not get nervous about the sometimes high volatility of stock prices, but keep their cool and stay in the game. Let’s take a look at the performance of German stocks in the blue-chip index, the DAX.

DAX return In the past 30 years, the German stock index (DAX) achieved an average return of 8.8%. A good amount – especially when considering that this value is significantly above the average inflation rate during this period.

So, in the last three decades, the DAX was able to offset the loss of purchasing power. And even more: in the end, there was a considerable increase in wealth. But only investors who had the DAX in their portfolio without interruption and also shed a few tears of despair in between benefited from this.

Because the bursting of the internet bubble in the stock market, the financial crisis, and the beginning of the Ukraine war shook the markets considerably. Volatility increased, and (temporary) losses reached high double-digit percentages. But what matters is what comes out in the end, as former Chancellor Helmut Kohl used to say.

Returns of stock fund savings plans Now let’s take a look at whether and how much money could be earned with a stock fund savings plan in the last 30 years. The values come from the most credible source, namely the industry association BVI.

A stock fund savings plan with a focus on Germany achieved an average return of 5.3% in the last 30 years. So, noticeably less than the German stock index (DAX). The reason for this is the (sometimes considerable) cost burden that comes with a stock fund investment. Fees and management costs can reduce the return by as much as one to two percentage points.

Stock fund savings plans with a European focus performed worse, with an average return of 4.1% annually. Meanwhile, stock fund savings plans with a global diversification performed significantly better in the past 30 years, with an average return of 6.7%.

Similar returns in the future? Whether it’s a stock fund savings plan or direct DAX investment (preferably through ETFs) – assuming that the results of the past are roughly achieved in the future, the „interest differential transaction“ from the combination of a non-amortizing construction loan and stock investment should pay off.

Whether there is any interest difference at all and how much it is depends on the investment focus (e.g., regional orientation) and the investment form (fund savings plan or ETF savings plan).

Is this combination really recommended and sensible? Not necessarily! Because the type of use – as a primary residence or investment property – determines the success of these financing methods for real estate.

Combined financing: primary residence „no,“ investment property „yes“ Stock investments naturally involve (sometimes considerable) risks. These risks can be significantly reduced by diversifying the investment and having a long-term orientation. When financing a property, the tax aspect must also be considered. It makes a difference whether a house or apartment is self-occupied or the property is rented out as an investment.

As a reminder: with the combination strategy, the construction loan remains non-amortizing, and the stock investment serves as a substitute for amortization. The initial loan amount remains at a consistently high level. In the end, the loan is repaid with the fund assets.

This means: a homeowner has no tax benefits from the frozen loan, because the loan interest is a private matter for a self-occupied property and irrelevant for the tax authorities.

Real estate investors, on the other hand, are allowed to offset loan interest (along with building depreciation, management fees, and other expenses) with their rental income to save on taxes. Therefore, the loan amount, which is frozen at a high level (along with the unchanged loan interest), could be advantageous for taxes – especially if the property owner has a relatively high tax rate.

Interest differential transactions can work A look at the past shows that the „interest differential transaction“ from the combination of a non-amortizing construction loan and a stock investment can indeed be successful. Taking into account the tax rules for different types of use of a property, in my opinion, this strategy is only suitable for rented properties. Whether the real estate owner and borrower have the nerve to withstand difficult and highly volatile times in the stock market … who knows, who knows.