What is prepayment penalty?
If borrowers want to repay their loan unscheduled or prematurely, for example as part of a debt rescheduling, banks generally charge a prepayment penalty. This serves to compensate the bank for the loss from lost interest income. A distinction must be made between compensation for installment loans and mortgage-backed loans.
Procedure for installment loans
Installment loans are also known as acquisition loans, consumer loans or personal loans. Repayments are possible at any time. The consumer credit directive regulates the maximum amount of compensation. If the borrower wishes to repay part or all of the remaining debt within the last year, the compensation fee may not exceed 0.5 percent of the repayment amount. If the loan is repaid early during the remaining term, the maximum possible compensation is 1 percent. In general, the prepayment penalty may not exceed the debit interest that the borrower would normally have paid up to the end of the loan term. This is effective for all installment loans that were concluded as of June 11th, 2010. The following applies to older loans: The installment loan can be repaid with a 3-month notice period. In the event of an immediate extraordinary termination, banks may deviate from the regulations. Some financial institutions waive prepayment fees, the fees and procedural modalities are regulated in the terms and conditions.
Prepayment penalty for real estate loans
Real estate, mortgage or annuity loans are characterized by a long term, high amounts and fixed interest periods for debit interest. The loss of interest income that the bank incurs in the event of early repayment of the loan is correspondingly higher. However, the calculation of the prepayment penalty for mortgage loans is not regulated as specifically as for installment loans. Borrowers should carefully check whether an unscheduled repayment or early loan repayment is worthwhile. Banks do not have to approve the repayment easily. If the property is sold, the bank is obliged to accept the repayment amount.
There is no prepayment penalty:
- after 10 years of credit and 6 months’ notice
- at the end of the first fixed interest rate with a term of less than 10 years and one month’s notice
- in the case of variable interest rates with a 3-month notice period
- for fixed-rate loans with an exit option
- for contractually agreed special repayments
Calculation of prepayment penalty
Lenders can calculate the loss of interest that arises because a replacement transaction can only be concluded on lower terms, in two ways. The “active-active method” refers to the new loan, the “active-passive method” to an alternative investment of the repayment amount in mortgage Pfandbriefe. The calculation methods are complicated, consumers should have the prepayment penalty given checked.