Special prepayment

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 results in a shortening of the loan term or a reduction of the loan installments.

Legal provisions on special prepayment

Provisions on the possibilities for a special prepayment are as a rule contained in the loan agreement or in the General Terms and Conditions of the credit institution.

There it is specified how often and to what extent a special prepayment is permitted without the borrower being charged a so-called prepayment penalty.

The most common application of a special prepayment is the early repayment of a mortgage loan. If consumer loans are repaid early, the prepayment penalty is limited under § 502 of the German Civil Code (BGB) to 1% and to 0.5% of the amount repaid early if the remaining term is less than one year.

For loans from building societies (Bausparkassen), the General Building Savings Conditions provide the possibility to make special prepayments of any amount at any time.

Prepayment penalty for special prepayment?

A prepayment penalty is the fee charged for an unscheduled loan repayment, i.e. a special prepayment, within a fixed-interest period if the repayment exceeds the agreed repayment options. Outside a fixed-interest period a special prepayment can be made at any time.

If the loan is not drawn down by the borrower after the contract has been concluded, a so-called non-acceptance compensation is payable, the calculation of which is based on the rules that apply to the prepayment penalty.

Prepayment and non-acceptance compensation compensate the lender for the loss suffered, which consists in the bank having already obtained the loan amount on the capital market at a certain interest rate and holding it available for its customer at a fixed interest rate.

With a fixed interest period of around ten years, the bank normally refinances itself "term-congruent" with a deposit that also has a ten-year fixed interest period.

Calculation of the prepayment penalty for special prepayment

The calculation of the prepayment penalty for a special prepayment can be carried out using two methods: Under the "active-active method" the damage to the bank that would arise from a new lending is determined.

Under the "active-passive method" a comparison is made with the interest rates currently achievable for mortgage-covered covered bonds.

In addition to a possible interest differential loss in the event of a special prepayment, the bank also incurs a loss of foregone profit (interest margin loss) when calculating under the active-active method.

The compensation is higher the longer the remaining fixed-interest term. After deduction of calculated credit risk costs and administrative expenses, case law has recognised an interest margin to be reimbursed 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, credit institutions usually apply the active-passive method, which is more advantageous for them, when calculating the prepayment penalty for special prepayment.

In doing so, the damage calculation is based on many individual mortgage bond transactions with maturities that differ from each other according to the number of loan instalments agreed in the contract.

The difference between the sums of money that the credit institution would have to invest to conclude these bond transactions and the loan amount repaid early in the case of a special prepayment is calculated as the prepayment penalty.

According to § 309 BGB, the borrower is entitled to challenge the calculation of a prepayment penalty for a special prepayment by proving that the actual damage is lower than the bank’s calculation.

This could, for example, be the case if the bank calculates the prepayment penalty for the special prepayment using the active-passive method but at the same time the credit institution makes a new lending.

Such a case is to be assumed, among other things, if the loan is repaid in connection with the sale of the house and the same bank provides 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 involved in a special prepayment. A discount (Disagio) that may have been agreed at the time 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 the prepayment penalty Banks are generally not obliged to withdraw the loan facilities they made available if the loan is secured by a mortgage.

Case law has, however, determined exceptions to this basic rule: if the property is sold or the credit institution rejects a later request by the customer for an increase in the loan, the prepayment penalty for a special prepayment is waived.