The prepayment penalty is an additional payment to the lender, for example the bank, which the customer must pay if he repays the loan early in the first 10 years of fixed interest rates.
The customer may reschedule an installment loan at any time, construction financing only if there is a legitimate interest. In both cases, the bank can request compensation. He may only change providers after 10 years or at the end of the fixed interest period without paying a prepayment penalty.
The prepayment calculator for mortgage lending
Banks are obliged to make the calculation of the prepayment penalty transparent so that the borrower can understand their amount. The prepayment calculator of the independent consumer portal Astro Lending supports interested parties and calculates the approximate amount of their prepayment penalty for a building loan.
The calculation basis is complicated, so compensation that devotes from the result of the prepayment calculator can be justified. If there is a large deviation, however, an inspection can be useful. For example, it could be possible that the bank did not take the maximum special repayment into account when calculating the prepayment penalty or calculated a higher administrative cost.
The prepayment penalty for the installment loan is calculated in this way
The calculation for installment loans that were concluded after June 11, 2010 is simple:
- The prepayment penalty for a prematurely terminated consumer loan may not exceed 1 percent of the remaining debt.
- If the remaining term is less than a year, the sum may only amount to a maximum of 0.5 percent of the remaining debt.
This limitation does not apply to building finance. The amount of the prepayment penalty is not capped even for installment loans that were closed earlier.
This is how the prepayment penalty for a building loan is calculated
Banks use one of two methods to calculate the prepayment penalty for a real estate loan:
- Active-active method
- Active-passive method
With the active-active method, the interest income lost due to the early repayment of the loan is compared with the interest income accruing from a new loan agreement. This calculation method is often cheaper for borrowers and is used by relatively few banks.
However, the calculation based on the active-passive method is used much more frequently. It provides that the credit institution calculates the prepayment penalty from the difference between two amounts:
- the payment flow agreed in the contract (interest, repayment, remaining debt at the end of the fixed interest period)
- and the interest income that would accrue if reinvested in mortgage loan with the same term.
Why is a prepayment penalty charged?
What is an advantage for the customer usually represents a financial disadvantage for the bank concerned as a lender. This also applies to the early termination of a loan: if the customer repays the loan early, the bank can no longer collect the interest calculated in advance. The bank incurs a loss of income. In order to compensate for this, she can calculate a prepayment penalty.
When no prepayment penalty is charged
A prepayment penalty is only calculated if the unscheduled repayment of the loan is made during the fixed interest period. In the case of variable-interest loans, where there is no fixed interest rate, there is no reason to calculate compensation. In the case of mortgage lending, follow-up financing can be concluded with another bank after the end of the fixed interest period without any prepayment penalty. If the borrowing rate is set to last longer than ten years, early redemption after the tenth year will also not result in compensation if the notice period of 6 months is observed.
Is it worth repaying the loan early?
Before borrowers redeem their existing loan prematurely, they should always take the prepayment penalty into account. To do this, they have to calculate whether the interest benefit that would result from the newly taken out (cheaper) loan as a total is really greater than the prepayment penalty to be paid. The advantage calculator for follow-up financing helps to determine how much dollars savings the interest rate difference between old and new loan actually means. If the interest savings are less than the prepayment penalty, it makes no economic sense for the borrower to terminate the existing loan early, even if the borrowing rate of the new loan is lower than before.