When selling a condominium, you may have to pay a prepayment penalty if you have taken out a loan to finance it. If you wish to terminate this loan prematurely, this is generally possible. However, the bank can demand compensation for the interest it has lost. This compensation is called a prepayment penalty. This claim by the bank can become due not only when selling a condominium, but also when selling a house. However, there are ways to legally avoid paying the early repayment penalty or to prevent it from becoming due in the first place. For example, you have the option of early loan termination if there is a legitimate interest. However, this is not always the case when selling a condominium. Find out what an early repayment penalty is and what you need to bear in mind so that this payment does not fall due.
Attention: All of the following information is provided without guarantee. For detailed advice, please contact your bank advisor or lawyer.
What is an early repayment penalty?
By definition, the early repayment penalty is a payment that you have to make to your bank after terminating a real estate loan. It is important for you to know that this payment is only due if you terminate the loan. If you receive a notice of termination from your bank, for example because you have fallen into arrears with the installments, you do not have to pay the early repayment fee.
The background to this regulation is the fact that real estate loans are usually taken out for a long period of time. Many loans have a minimum term of ten years, some even longer. The repayment period can be extended to up to 25 years. This has advantages for you as a customer, but also for the bank. Both sides benefit from the arrangement with planning security. You know how high the installments will be and the bank can count on guaranteed income. If you cancel early, the bank loses the supposedly secure income. The early repayment penalty is intended to cushion the loss.
Compensation for early repayment: The legal basis
The legal basis for charging a prepayment penalty is set out in Section 490 (2) BGB. This paragraph defines the requirements for the termination of loan agreements. This gives the bank the right to demand compensation for lost interest as a result of the customer’s termination. A
Early repayment compensation may also be due in accordance with § 502 BGB. This law explicitly states that a lender may charge a compensation payment as damages. Both sections define the legal basis for the bank’s claim in the form of a prepayment penalty.
Compensation for early repayment: The requirements
An important prerequisite for the calculation of the early repayment penalty by the bank is an actual loss. The bank does not have the right to calculate the compensation arbitrarily. There must be a loss of interest for the bank to be able to claim early repayment compensation. As a rule, this loss is incurred if you as a customer terminate a mortgage before the end of the term. In this case, the bank loses interest, which it absorbs through the early repayment penalty. However, the early repayment penalty only applies if you terminate the loan without a legitimate interest. If such a legitimate interest exists, for example in the case of termination for good cause, the bank may not demand an early repayment penalty. The same applies if the bank terminates your loan. Even then, charging a prepayment penalty is not permitted. If the borrower dies and the heirs do not waive the inheritance, they take over the loan as the legal borrower. In this case, termination without a legitimate interest would also result in an early repayment penalty becoming due.
When does an early repayment penalty apply?
When can the bank charge a prepayment penalty? If you terminate a mortgage early, the bank must accept the termination. If it does so, it can demand compensation for the outstanding interest payments. On the one hand, this involves interest payments that would have been incurred in the future for drawing down the loan. On the other hand, the bank compensates a so-called refinancing loss with the early repayment penalty. As a rule, the bank can invest the money from the repaid loan at a lower interest rate than was the case when the loan was granted. This loss is also compensated by the early repayment penalty.
When is there no early repayment penalty?
A prepayment penalty does not automatically apply when you terminate a real estate loan. There are cases in which you do not have to pay the fee. You can keep an eye on the early repayment penalty when you take out the loan. There are banks that work without this fee by default. Find out about the conditions in the small print of the terms and conditions or ask specifically. If you conclude the contract without the early repayment penalty option, you don’t need to worry about possible costs if you terminate the loan early. However, there are other cases in which you do not have to pay a prepayment penalty.
Case 1: Termination after 10 years
After a loan term of ten years, you have the right to terminate the financing. If you have serviced the loan over a period of ten years, the bank is no longer entitled to demand a prepayment penalty from you. For you, this means that you can terminate the loan without an early repayment penalty. This is also possible if the initial term of your loan is more than ten years. In order to secure favorable interest rates, customers sometimes opt for a term of twelve to 15 years. If you decide to terminate the loan after ten years, for example to take out a debt restructuring or to sell the condominium, you do not have to expect any additional costs.
Case 2: Incorrect revocation instruction
In the past, many customers were able to terminate their mortgage without paying a prepayment penalty. In doing so, they relied on a ruling by the European Court of Justice, which applies uniformly to all European countries. This ruling states that a bank cannot demand early repayment compensation if it has issued incorrect cancellation instructions. Certain requirements are linked to the withdrawal policy. If the bank does not adhere to them or forgets to inform the customer about the revocation, one of the consequences is an ineffective early repayment penalty. As a layperson, it is usually difficult to determine whether your bank’s withdrawal policy complies with the applicable regulations. It is therefore advisable to seek legal advice or have the revocation instructions checked by a lawyer. In many cases, the bank is not allowed to charge an early repayment penalty and you can get out of the contract without any additional costs.
Case 3: Incorrect information on the early repayment penalty
When you receive the calculation for the payment of a prepayment penalty, it is important that you check the values. This applies not only to an early repayment penalty for real estate financing, but also, for example, to compensation for the early termination of a consumer loan. There is a ruling by the Higher Regional Court of Frankfurt am Main from 2020, in which the judges state that a bank is not entitled to early repayment compensation if the calculation is incorrect. In this case, the customer does not have to pay. They also do not have to accept an alternative or corrected calculation. In view of this ruling, it is advisable to have the calculation of the early repayment penalty checked by an expert. This could be a tax consultant or a lawyer. Alternatively, the consumer advice centers can also help with the calculation of the early repayment penalty and offer to check the values. If the calculation is incorrect, inform the bank in writing. Refer to the ruling of the Higher Regional Court and reject the payment in this context.
Case 4: Loan termination by the bank
Many customers ask themselves whether an early repayment penalty is due if the bank terminates the loan. The clear answer here is “no”. The bank only has very limited options for terminating a loan. The bank is entitled to do so if you are significantly in arrears with the installments. If you pay an installment late, this is not sufficient for termination. If the bank does not agree and decides to terminate the loan, it cannot demand early repayment compensation. This is also the case if the term of the loan is less than ten years and if an early repayment penalty has been agreed in the terms and conditions. Upon termination, the bank forfeits its right to receive an early repayment penalty from the customer.
How high is the early repayment penalty when selling a condominium?
The amount of the early repayment penalty when selling a condominium is not defined by law. There are guidelines that have been set by the courts over the years. Nevertheless, banks have considerable leeway, which they usually use in their favor. If you want to terminate your construction financing for your condominium early, you can expect to pay an average of ten percent of the outstanding debt. If you still owe the bank an amount of EUR 100,000 on early termination, you will repay an average of EUR 110,000 to the bank. There are banks whose claim is in the range of six to seven percent of the outstanding debt. In any case, the amount of the early repayment penalty is considerable. It is therefore always sensible and advisable to look for ways in which you can avoid paying the early repayment penalty.
How is the early repayment penalty calculated? - An example
You can calculate the early repayment penalty in different ways. There are different calculation bases: the asset-liability method and the asset-liability method. It is up to the bank which method it uses. There are no statutory guidelines here either. The difference between the two methods is as follows:
Active-active method
This calculation serves as the basis if the bank lends the money it receives on termination of the loan directly to another borrower.
Active-passive method
This calculation method is used if the bank initially invests the money in mortgage bonds for mortgages or in securities.
A calculation example using the asset/liability method:
Start of the term of the loan agreement: 01.01.2016
End of the debit interest commitment: 01.01.2026
Current remaining debt: EUR 135,000
Debit interest rate: 2 %
Current repayment installment per month: EUR 670
Possible unscheduled repayment per year: EUR 10,000
Planned termination date: 01.01.2021
Interest deterioration loss: EUR 10,928.72
Risk savings (based on 0.1 %): EUR 430.87
Savings on administration costs (based on EUR 4 per booking process): 240 EUR
Processing fee of the bank: EUR 200
Early repayment penalty: EUR 10,457.85
According to this calculation example the customer would have to pay a prepayment penalty of EUR 10,457.85.
If you are affected by your bank’s demand for an early repayment penalty, you can have this reviewed. There are other ways of avoiding the payment or at least recovering part of it.
Tip 1: Check the bank's calculation and recover the early repayment penalty if necessary
If your bank charges you an early repayment penalty, it is important to have this calculation checked. If the early repayment penalty is too high, you have the right to refuse payment. Here you can refer to a court ruling that has strengthened the rights of customers in this context.
Tip 2: Use an existing special repayment right
Many loan agreements include a special repayment right. This often only applies to part of the loan amount. As a rule, however, you can make use of the repayment right once a year. Take a look at your loan agreement and find out whether a special repayment right has been agreed and how much it is. Then check whether you will be able to service the loan within a reasonable period of time with the help of this special repayment right. If you succeed, you will not have to pay an early repayment penalty to your bank.
Tip 3: Deduct the early repayment penalty from tax
In certain cases, you can deduct the early repayment penalty from your tax bill. This is possible as part of income-related expenses if the following conditions are met:
- This is a rented condominium that will remain in a rented state even after the purchase. You have opted for a debt rescheduling, from which the early repayment penalty has arisen.
- You can claim the early repayment penalty as a disposal cost for tax purposes.
In both of these cases, the early repayment penalty is tax-deductible.
How can I avoid the early repayment penalty?
Can you avoid the early repayment penalty? There are several options, which we have summarized for you below.
Object exchange
You can avoid the early repayment penalty by exchanging properties. This works if you want to sell your home and buy another property. You put the new property up as security for the loan. The bank usually agrees to this if the value of the new property covers the loan.
Debtor exchange
You can transfer the real estate loan to another debtor. This could be the new owner if the condominium is sold. There is no early repayment penalty when the loan is transferred, as it will continue to be serviced. The bank’s approval is required, but should not be a problem if the buyer has a good credit rating.
When is it worth paying off a loan early despite a prepayment penalty?
There are some cases in which it seems worthwhile to pay the early repayment penalty and thus accept it. Here are a few examples:
- After a death, you would like to sell the property and no longer service the loan
- You would like to refinance to save interest
- You would like to take advantage of more favorable follow-up financing
- The ten-year fixed-interest period has not yet expired and you have received an attractive loan offer
Selling your home despite early repayment compensation: how to proceed
You want to sell your condominium before the fixed-interest period expires and repay the existing loan. Cancel your loan and wait for the bank’s decision and the calculation of the early repayment penalty. In the second step, have the amount of the early repayment penalty checked. Proceed in the same way with the terms and conditions for the loan and the cancellation policy. You only have to pay the early repayment penalty if everything is correct. Errors made by the bank will be interpreted in your favor and you will not have to pay. It is therefore always worth having a check carried out.
FAQ - Frequently asked questions
Do heirs have to pay early repayment penalties?
Heirs assume all of the deceased’s liabilities, including the real estate loan. If the heir cancels the loan, he or she must pay the early repayment penalty. According to a ruling by the Cologne Fiscal Court, the early repayment penalty is not a liability of the estate. This means that the sum cannot be deducted as a percentage of the inheritance tax. The court is of the opinion that it is not a liability of the estate.
What is the so-called "revocation joker" for early repayment penalties?
If you would like to avoid the early repayment penalty, you may be able to use the so-called revocation joker. This is an option based on a ruling by the European Court of Justice. If the bank has not drafted the revocation instructions in accordance with current law, it is possible to revoke the loan without having to pay a prepayment penalty. In case of doubt, it is advisable to have the early repayment penalty checked by a lawyer in the context of the ECJ ruling.
Can I negotiate the early repayment penalty with the bank?
In principle, it is possible to negotiate the early repayment penalty with the financing bank. This allows you to terminate the loan agreement by mutual agreement. Another option would be to conclude a new loan agreement with the bank with more favorable conditions. In principle, the bank can also declare a waiver of the early repayment penalty. There are banks that declare that they do not want to charge a prepayment penalty when the loan is taken out.
Can the prepayment penalty be paid in installments?
Many customers ask themselves whether it is possible to spread the early repayment penalty over several years and thus pay in installments. In principle, this is not possible and the payment is due in one lump sum. However, you can apply for a classic installment loan from the bank and pay off the prepayment penalty in this way. If it is a larger sum that you cannot pay in one lump sum, you often have no choice but to take out an installment loan.
Is the early repayment penalty tax-deductible?
In some cases, it is possible to deduct the prepayment penalty from your tax bill. If you sell a condominium that is rented out, you can deduct the prepayment penalty as income-related expenses under the heading of income from renting and leasing. It is also possible to deduct the prepayment penalty from the sales profit as part of the sales costs. If you are unsure about this, a tax advisor can help you.
