Early repayment

Early Repayment - Early repayment (extra payment or full repayment) refers to the repayment of a mortgage before the agreed end of the term. It reduces the outstanding balance faster than the repayment schedule provides for and saves on interest. In the case of full early repayment within the fixed-rate period, the bank typically charges an early repayment penalty to compensate for lost interest income.

Extra payment vs. full repayment

Extra payment - a contractually agreed-upon annual additional payment (typically 5-10% of the original loan amount) that reduces the remaining debt. Extra payments are free of charge and governed by the loan agreement. Full repayment - the complete repayment of the remaining loan balance before the end of the fixed-rate period. This triggers an early repayment penalty (VFE), unless the fixed-rate period has already expired or the loan term is longer than 10 years (special right of termination under Section 489(1)(2) of the German Civil Code (BGB) with a 6-month notice period).

The special repayment is the most important tool for rapid debt reduction. Anyone who consistently exercises their right to make special repayments each year can significantly shorten the term of a loan: For a loan of 300,000 euros with a 3.5% interest rate and a 2% initial repayment, an annual special repayment of 10,000 euros (approx. 3.3% of the loan amount) reduces the remaining term from approximately 30 years to around 22 years. The interest savings amount to several tens of thousands of euros. Many loan agreements allow for an extra payment only once a year on a specified date-check your contract to see when the right to make an extra payment can be exercised.

Early repayment penalty

The prepayment penalty is calculated as the difference between the bank’s lost interest income and the return on reinvestment in the capital market, minus saved risk costs and administrative costs. The amount depends on the outstanding loan balance, the contractual interest rate, the remaining term, and the current interest rate level. Since 2016, the calculation methods for real estate loans have been more strictly regulated by Federal Court of Justice (BGH) case law. Typical prepayment penalty amounts range from 3-10% of the remaining debt-for a loan of 200,000 euros, this can amount to 6,000-20,000 euros.

The bank is required to disclose the calculation of the VFE in a transparent and comprehensible manner. In practice, banks sometimes set the VFE too high-particularly when selecting the benchmark yield (German government bonds vs. mortgage bond rate). A review by an independent expert or the Bavarian Consumer Advice Center is recommended, as errors in the bank’s calculation often amount to hundreds or thousands of euros.

When is early repayment worthwhile?

The decision for or against early repayment depends on several factors: the current interest rate level, the amount of the VFE, alternative investment opportunities, and the personal need to be debt-free. If current market interest rates are higher than the contract rate, the VFE is generally higher-in which case early repayment is often not financially worthwhile. If market interest rates have fallen (as was the case most recently before 2022), the VFE is lower, and refinancing to more favorable terms may make sense.

Practical Tip for Property Owners in Nuremberg

We recommend that property owners in the Nuremberg metropolitan area agree to a generous special repayment option when signing the contract-at least 5%, preferably 10% per year. The costs for this are minimal (0-0.05% interest surcharge). Make consistent use of the special repayment option to save on interest. If you’re planning to sell: Check whether your loan has been active for more than 10 years-if so, you can prepay it for free (Section 489 BGB, 6-month notice period). Always have the prepayment penalty reviewed by an independent expert-banks often overestimate the prepayment penalty.

In the Nuremberg metropolitan area, we observe that many homeowners accept the prepayment penalty as an unavoidable incidental cost when selling real estate without questioning the calculation. We recommend having the bank’s calculation reviewed at least by the Bavarian Consumer Advice Center (Nuremberg office, Adlerstraße)-the service is inexpensive and uncovers errors.

Frequently Asked Questions

When can I pay off the loan without an early repayment penalty?

Free redemption is possible: after the fixed-interest period expires (with 1 month’s notice), after 10 years of the term regardless of the fixed-interest period (Section 489(1)(2) BGB, 6-month notice period), for variable-rate loans (3-month notice period), and within the scope of the contractually agreed special repayment right. In the case of a defective loan agreement (e.g., incorrect cancellation policy), a cancellation may also avoid the prepayment penalty.

How much is the prepayment penalty?

The amount depends on the individual case: For a remaining loan balance of 200,000 euros, a remaining term of 5 years, and an interest rate difference of 1.5%, the prepayment penalty amounts to approximately 10,000-15,000 euros. The bank must disclose the calculation. Have the prepayment penalty reviewed-consumer advice centers and specialized service providers offer calculation reviews for approximately €50-150. Errors in the bank’s calculations are not uncommon.

Is early repayment worth it?

An extra payment is almost always worth it: Every euro that reduces the remaining debt saves interest for the entire remaining term. With an interest rate of 3.5% and a remaining term of 15 years, an extra payment of 10,000 euros saves approximately 5,250 euros in interest. A full payoff with prepayment fees is only worth it if the interest savings exceed the prepayment fees-calculate carefully. When moving or selling, a payoff is often unavoidable; in this case, you should factor the prepayment fees into your selling costs.

Can I transfer the loan to a new owner?

No, a loan assumption by the buyer is not possible in Germany without the bank’s consent. The bank has the discretion to decide whether to accept the buyer as the new borrower. In practice, loans are almost always paid off when a property is sold-either by the seller before closing or through the purchase price as part of the notarial settlement.

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