An unscheduled repayment of a loan that goes beyond the repayment agreed in the loan contract is referred to as a special prepayment. A special prepayment leads to a shortening of the loan term or to a reduction of the loan instalments.
Provisions on the options for a special prepayment are usually contained in the loan agreement or in the General Terms and Conditions of the lending institution.
There it is specified how often and in what amount a special prepayment is permitted without the borrower being charged the so-called prepayment compensation.
The most common use case for a special prepayment is the early repayment of a mortgage loan. If consumer loans are repaid early, the prepayment compensation is limited under § 502 BGB to 1% and, if the remaining term is less than one year, to 0.5% of the early-repaid amount.
For loans from building societies (Bausparkassen), the General Bauspar Conditions generally permit special prepayments of any amount at any time.
Prepayment compensation for special prepayment?
Prepayment compensation is the fee charged when a loan is repaid unscheduledly, i.e. a special prepayment, during a fixed-rate period if the repayment exceeds the agreed repayment options. Outside a fixed-rate period, a special prepayment can be made at any time.
If the borrower does not draw down the loan after the contract is concluded, a so-called non-acceptance compensation is payable, the calculation of which follows the rules applicable to prepayment compensation.
Prepayment and non-acceptance compensation compensate the lender for the loss it suffers because the bank has already procured the loan amount on the capital market at a certain interest rate and is holding it available for its customer at a fixed interest rate.
With an interest-rate fixation period of about ten years, the bank normally refinances itself "term-congruently" with a deposit that also has a ten-year fixed interest period.
Calculation of prepayment compensation for special prepayment
The calculation of the prepayment compensation for a special prepayment can be carried out using two methods: under the "active-active method" the loss the bank would suffer in the event of a new lending is determined.
Under the "active-passive method" a comparison is made with the interest rates currently achievable for mortgage-backed covered bonds.
In addition to a possible interest differential loss in the case of a special prepayment, the bank also incurs a loss of foregone profit (interest margin loss) when calculated according to the active-active method.
The compensation is all the higher the longer the remaining fixed-rate period. After deduction of calculated credit risk costs and administrative expenses, case law has recognised a refundable interest margin of 0.5% per year.
Active-passive method for special prepayment
Since the active-active method regularly represents the more favourable solution for the customer, lending institutions usually apply the active-passive method for special prepayment, which is more advantageous for them.
For this purpose, the damage calculation is based on many individual mortgage covered bond transactions that differ in term according to the number of instalments agreed in the contract.
The difference between the amounts of money the lending institution would have to invest to conclude these covered bond transactions and the amount of the loan repaid unscheduledly in the event of a special prepayment is calculated as prepayment compensation.
Pursuant to § 309 BGB, the borrower is entitled to challenge the determination of prepayment compensation for a special prepayment by proving that the actual loss is lower than the bank's calculation.
This could be the case, for example, if the bank calculates the prepayment compensation for the special prepayment using the active-passive method while at the same time a new lending is carried out by the lending institution.
Such a case is to be assumed, among other things, if the loan is redeemed on the occasion of a house sale and the same bank carries out a new financing of the property.
Processing fee and discount (Disagio) for special prepayment
Furthermore, the bank may charge a processing fee for the effort incurred in connection with the special prepayment. A discount (Disagio) that may have been agreed when the loan was granted cannot be reclaimed by the borrower in the event of a special prepayment, since it has the legal character of an interest prepayment.
However, a discount is always associated with a lower nominal interest rate on a loan, so that the amount of the damage in the event of a special prepayment is reduced.
Exceptions to the calculation of prepayment compensation Lenders are generally not obliged to withdraw the loan funds they have made available if the loan is secured by a land charge.
However, case law has determined exceptions to this general rule: if the property is sold or the lending institution refuses a later request by the customer to increase the loan, the calculation of prepayment compensation for a special prepayment is waived.