Early repayment penalty

Early repayment penalty - An early repayment penalty is a fee that banks and financial institutions are permitted to charge if a borrower repays their mortgage in full before the end of the agreed fixed-rate period. It is intended to compensate the bank for lost interest income and is regulated by law in Section 502 of the German Civil Code (BGB).

What exactly does early repayment penalty mean?

When financing a property, borrowers typically commit to a specific interest rate for a fixed period-the so-called fixed-rate period, which is often 10, 15, or 20 years. If the loan is paid off early within this period-for example, because the property is sold or a more favorable refinancing is sought-the bank incurs a loss: It loses the calculated interest income for the remaining term and must reinvest the recovered capital under potentially less favorable terms.

In practice, the early repayment penalty is calculated using the so-called asset-liability method, which the Federal Court of Justice has clarified in several rulings (including BGH XI ZR 285/03 and BGH XI ZR 388/14). In this method, the bank’s loss of interest is determined by comparing the originally agreed-upon loan interest rates with the returns the bank could achieve by reinvesting in the capital market. The greater the difference between the contractual interest rate and the current market rate, the higher the prepayment penalty. During periods of low interest rates, the penalty can therefore be particularly painful, whereas it is significantly lower-or may even be waived-when market interest rates are rising.

For consumer loans taken out after June 10, 2010, statutory caps apply: The prepayment penalty may not exceed 1 percent of the amount repaid early if the remaining term is more than one year. If the remaining term is less than one year, the cap is 0.5 percent. This regulation protects consumers from disproportionately high penalty claims.

A particularly important aspect is the special right of termination under Section 489(1)(2) of the German Civil Code (BGB): Any borrower may terminate their loan 10 years after full disbursement with six months’ notice-without paying an early repayment penalty, regardless of the originally agreed fixed-interest period. This right is mandatory and cannot be excluded by contract.

Calculation and Common Pitfalls

The correct calculation of the prepayment penalty is complex and difficult for laypeople to understand. Banks must take into account any special repayment rights contractually granted to the borrower as a mitigating factor-the Federal Court of Justice (BGH) has explicitly clarified this. In practice, however, many financial institutions do not correctly factor in these special repayment options, leading to excessive claims. Consumer protection agencies estimate that approximately one-third of all prepayment penalties are calculated incorrectly.

Furthermore, the right to an early repayment penalty is completely waived if the bank terminates the loan due to a payment default. Likewise, there is no entitlement if the cancellation policy in the loan agreement was incorrect-in this case, the contract can be canceled, and the bank must waive the penalty.

Practical Tip for Homeowners in Nuremberg and Franconia

Anyone in the Nuremberg metropolitan area who wants to sell a property and still has an outstanding loan should ask their bank early on about the amount of the prepayment penalty. Many homeowners in Franconia underestimate this cost factor, which can quickly reach five-figure amounts for a loan over 300,000 euros with a long remaining term.

Our network of experts recommends having the bank’s calculation reviewed by an independent financial advisor or the Bavarian Consumer Advice Center. If the loan has been outstanding for more than 10 years, it is essential to check whether the free special right of termination under Section 489 of the German Civil Code (BGB) applies. Even a buyer who assumes the existing loan-a so-called debtor swap-can avoid the prepayment penalty, provided the bank agrees.

Frequently Asked Questions

Is the prepayment penalty tax-deductible?

Yes, under certain conditions. If the property is rented out and sold within the speculation period, the prepayment penalty can be claimed as income-related expenses against rental income. For owner-occupied properties, however, a tax deduction is generally not possible. An individual review by a tax advisor is advisable in any case.

How much is the prepayment penalty typically when selling a property?

The amount depends on the remaining debt, the remaining fixed-rate period, and the interest rate differential. As a rough guide, for a loan of 250,000 euros with a remaining term of five years and an interest rate differential of two percentage points, you can expect a penalty of approximately 15,000 to 25,000 euros. However, an exact calculation must be performed individually by the bank.

Are there ways to avoid the prepayment penalty?

Yes, there are several options: First, the special right of termination can be exercised after 10 years. Second, contractual special repayment rights can reduce the amount of compensation owed. Third, a debt swap can be agreed upon with the buyer, whereby the buyer assumes the loan. It is also worth reviewing the cancellation policy-if the policy contains errors, the bank’s claim for compensation is void.

As a homeowner, how do I verify that the bank’s calculation is correct?

Banks are required to present the calculation of the prepayment penalty transparently and to explain it in writing upon request. Anyone wishing to review the calculation should request a written breakdown from the bank that clearly shows the calculation method used (asset-liability method or asset-asset method), the comparative interest rate, the special repayment amount taken into account, and the remaining term. In the next step, the calculation can be reviewed by an independent financial advisor or the Bavarian Consumer Advice Center. The latter offers such reviews in Nuremberg (Königstraße) and at other advice centers in the metropolitan region-often, a single, fee-based consultation session lasting 60 to 90 minutes is sufficient to identify an incorrect calculation. If calculation errors are proven, homeowners can informally claim the difference from the bank; if this is unsuccessful, a complaint can be filed through the banking ombudsman.

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