Early repayment of a large loan vs. settlement of a small loan

Dear community,

I am facing the following problem/decision:

Our home financing is based on two loans
1) L-Bank loan (1.6% interest - no special termination right - term 10 years - outstanding debt approx. 40,000 euros)

2) Annuity loan (2.3% interest - 2% repayment - fixed for 15 years)

We have about 400 euros left per month. Now we have two options:

I) We save the 400 euros per month and pay off the L-Bank completely after 10 years (after that, we could put the 400 euros plus the L-Bank installment into the large financing) or
II) we invest approximately 5,000 euros annually as a special repayment directly into the large contract (and then would have to refinance the L-Bank loan)

Which would be the better alternative?!

Thank you very much in advance for your competent answers...

About a week ago, I made a similar calculation with KFW 1.4% and annuity loan 2.9%. However, with us, the KfW can be repaid early directly. I decided on early repayments for the large annuity loan during the first 2 years and we will continue to do so in the future. The approx. 35,000€ from the KFW will probably be refinanced over 8 years.

Basically, the rule is: always repay the loan first that now [and that's the catch] (later) causes the highest costs. So in 90% of cases, it is likely the loan with the higher interest rate.

It may then eventually happen that the extension at L-Bank becomes more expensive (with rising interest rates) [haha], but then you can also request a counteroffer for the remaining amount from the house bank. And there, the outstanding balance due to special repayments in the loan has so far been rather lower and the conditions potentially correspondingly good.

Hello,

normally I would say always make extra repayments on the more expensive loan. I cannot connect mix toxi with the negotiation and counteroffer. It only makes sense in connection with the repayment of the main loan and if a similar interest rate level prevails in 10 years. Otherwise, you have a small loan of 40k and have to refinance subordinated afterwards. Neither is optimal.

Can't you split the extra repayment?

That would not be subordinated if you finance with the mentioned mortgage bank. The mortgage of the mortgage bank is already registered as first priority.

What would be the better alternative?!

That depends. Specifically on the interest rate of the follow-up loan with which the remaining debt of the first loan is refinanced. In my opinion, it is a trade-off between security and return. In your option 1, you have peace of mind and certainty until the end of the 15-year fixed interest period. In option 2, you may have the higher return, but you face the interest rate risk after 10 years.

Of course, you can also choose a middle way ...