Termination of the loan entails a prepayment penalty
In addition to the special right of termination after ten years of loan repayment, there are also other situations in which one can prematurely terminate his contract.
For example in case of unemployment, a new job in another city or a divorce. In these cases, however, the lender usually requires a prepayment penalty for the lost profit, which can quickly amount to a sizeable sum in periods of low interest rates.
Missed interest payments justify the prepayment penalty
Several factors are included in the calculation of the interest damage caused by the early termination. First and foremost, it’s about the sum of lost interest payments. However, for this purpose, the lender may only charge the interest until the special right of termination after ten years, plus six months’ notice. In addition, most banks charge a processing fee of a few hundred euros.
Advantages of early termination of the loan for the bank are to be deducted
The resulting sum is, however, lowered by a few other factors. For example, the bank must calculate the prepayment penalty as if the customer had fully utilized its agreed special repayment right over the remainder of the repayment term. A future interest income through the reinvestment of the repayment amount – for example in mortgage – must be deducted from the amount of the loss. The higher the interest rate of the , the lower the prepayment penalty. In addition, the saved administrative costs – usually 100 to 150 euros a year – and the costs of the loan risk that has been eliminated – between 0.01 and 0.1 percent of the loan amount per year – have to be deducted. The cut-off date for the calculation is the day on which the remaining debt arrives in the bank’s account.
Example calculation prepayment penalty
For a loan of 150,000 euros, a term of 15 years, an interest rate of four and a repayment of three percent, the customer’s monthly installment is 875 euros. The remaining debt after seven years is around 114,000 euros. In the remaining period of three years and six months – until the customer has a special right of termination – the bank would have received just under EUR 14,500 in interest. However, interest income from reinvestment, for example in mortgage , and the cost advantages resulting from the saved administrative costs and the eliminated loan risk must be deducted from this. If one subtracts all these positions, there is a prepayment penalty of around 8,500 euros, which the customer must pay to the bank as a result of his early termination of the loan.