German Mortgage Glossary

Prepayment Penalty

(Vorfälligkeitsentschädigung)

In case of premature cancellation, that is before expiry of the contractually agreed fixed interest period, the borrower will be charged for the difference the bank earns on the mortgage and what it earns if it reinvests the money. Make no mistake: what the bank earns is typically much higher (1-1,5%) then what they get if they invest in government bonds. This difference reflects their risk mark-up,and compensation for cost. So the penalty can be considerable if you leave your home well before the fixed interest period runs out. 

 After 10 years, the borrower can cancel the existing loan with a 6-month notice without paying this fee.

The penalty is also reduced when market interest rates have increased beyond when you concluded your mortgage. The penalty can go up if market interest rates decline. The risk of a high penalty in the future if you conclude a mortgage now, is  lower these days, because interest rates are near historic lows.