If you want to get out of your loan contract early, you have to pay the bank a prepayment penalty. The amount of this compensation depends on the type of loan, on 1 percent of the remaining debt for installment loans and up to several thousand euros for mortgage or real estate loans. But there are also cases when you can cancel your loan without prepayment penalty.
What does prepayment penalty mean?
If you want to cancel your building loan earlier than planned, a bank is entitled to oblige you to pay a prepayment penalty. In other words, the prepayment penalty is a bank’s claim for damages to the customer. If the borrower repays the loan early, a significant portion of the bank’s planned interest is lost. This means that the bank would make less profit with such a customer. As a result, banks can request a prepayment penalty to offset their losses.
Termination of the contract without prepayment penalty
There are a few cases where a borrower can terminate their real estate loan earlier than planned without paying the prepayment penalty:
- Ten-year period. Even if the fixed interest rate on your real estate loan is 15 or 20 years, your loan contract can be terminated after 10 years. The prepayment penalty may not be requested – it is regulated by law (Section 489 (1) No. 2 BGB). 10 years are counted from the date when the loan was paid to you in full. However, a notice period of 6 months must still be observed, but after 10 years and 6 months your real estate loan can be redeemed in any case.
- The cancellation policy is incorrect. When concluding the contract, you have a right of withdrawal, which you can use to cancel your loan. Every bank is obliged to provide you with proper information. However, in recent years, erroneous revocation instructions have been used by many financial institutions. If your contract contains incorrectly formulated cancellation instructions, you are entitled to withdraw your credit, even a few years after the contract was signed. Then you will repay your loan without prepayment penalty.
The cancellation policy must be professionally reviewed in your contract, and you may also need the assistance of a lawyer.
Note: If you have an old contract that was concluded between September 1, 2002 and June 10, 2010, it can no longer be revoked.
How to get out of your contract
Although it is regulated by law, it is sometimes not easy to cancel a loan agreement. Here’s how to do it:
- Have the revocation instruction checked by a lawyer.
- If the bank will accept your withdrawal, you must be ready to repay the remaining loan amount within 30 days. To do this, get a new debt rescheduling offer.
- Write a letter to the bank indicating the wrong places in your cancellation policy.
If the bank refuses to withdraw your consent, consult a lawyer who will legally represent you.
Conclusion: If a bank requests you to pay a prepayment penalty if you terminate the contract prematurely, you first have to find out in which situations you really have to pay this compensation. In some cases you will also need professional support from a lawyer.