How to reclaim your early repayment penalty (VFE) when selling a house or apartment

Real estate owners who want to sell their property and have not yet paid off their loan must deal with prepayment penalties. Can you claim the prepayment penalty back? How high can the prepayment penalty be? Is it possible to avoid the prepayment penalty or get back a penalty that has already been paid?

Early repayment penalty and borrowers' rights in mortgage loans

Real estate financing involves long-term fixed interest rates. This is advantageous for both the borrower and the lender, as it provides both contracting parties with a high degree of planning security through fixed installments.
Borrowers can, under certain circumstances, terminate their real estate loan and repay the credit to the bank earlier than agreed, even before the fixed-interest period expires. Selling a house or an apartment is sufficient to early loan repayment to demand from the financial institution.

The bank is entitled to demand compensation for this, as it cannot invest the money at the interest rate it would have received for the granted loan amount during the remaining fixed-interest period. The amount of compensation, also known as prepayment penalty, depends on the interest rate that a bank uses as a basis for the replacement investment. The Federal Court of Justice (BGH) has ruled that credit institutions must use the yield on mortgage bonds to calculate the prepayment penalty.

If the borrower has concluded a loan agreement but has not drawn down the credit, the bank may charge a prepayment penalty for the lost interest. To determine the amount of the prepayment penalty, the following data are necessary: the redemption date, the amount of the remaining debt as of the redemption date, the interest rate, the monthly installment, and the end of the fixed-interest period. The maximum amount of special repayments is also relevant if this right was granted to you in the loan agreement. The Federal Court of Justice has ruled that special repayment rights must be taken into account, even if they have not yet been used by the borrower.

The calculation of the damages for interest deterioration is very complex, which is why borrowers should not rely on the bank. In any case, they should resort to competent advice in order to reduce the payments as much as possible. Taking up the fight against banks and insurers alone is often somewhat akin to fighting windmills.

The prospects of success are extremely attractive, but require experienced legal support for successful implementation in the form of careful legal review of the concluded contracts and the (realistic) calculation of potential claims. Without Mentorship by an experienced lawyer in banking and capital markets law no one should act on their own here!

Our years of expertise and our network of cooperating partners and law firms enable us to provide you with first-class service and support. Please feel free to contact us about this without any obligation..

For the sake of completeness, we would like to point out that many half-truths and myths circulate, particularly regarding the topic of „cancellation of life insurance policies.“ Theoretically, of course, every customer can handle the cancellation themselves. Our partners can also help you here.

When are banks not allowed to charge a prepayment penalty?

If the bank terminates an existing mortgage loan

If mortgage loan installments are missed, the bank will terminate the loan agreement. In this case, the credit institution may not demand an early repayment penalty.

If the interest rate is variable

This is also a reason for which banks are not allowed to charge fees for early repayment. In plain English, this means that the interest rates are adjusted to the current interest rate level at regular intervals. If such a loan agreement was concluded, no prepayment penalty may be charged either.

If the property was financed by a building society loan

Unlike a mortgage loan, a building society loan can be partially or fully repaid at any time. Neither deadlines nor additional fees apply. This option for making unscheduled repayments is stated in the general terms and conditions for building society loans issued by the building societies.

No prepayment penalty in the event of a property exchange

Let us assume that the reason for the sale is the purchase of another property that will be financed by the same bank again. In this case, the financial institution also does not charge an early repayment penalty. It incurs no loss of interest as a result, because a new mortgage loan is taken out with the same bank.

The real estate loan is assumed by the new buyer during the property sale.

The ideal scenario occurs when the new buyer takes over the seller's loan agreement during a real estate sale. However, the bank must agree to this procedure. The buyer must have a steady income and good creditworthiness. The income must be high enough to cover monthly living expenses and still be able to pay the loan installments.

The banks' calculation should be reviewed by experts.

If none of the above reasons apply and the bank actually charges a prepayment penalty, it should be reviewed by professionals. Independent legal and financial experts review these calculations.

Good to know

Regardless of the prepayment penalty, the bank may not refuse to terminate the loan upon the sale of the property. If the property is gone, the loan is no longer secured either. A bank also may not refuse termination if the borrower wanted to increase the existing loan and the bank refused, and the borrower obtained the loan from another bank. This scenario applies when an extension or modernization is planned.

Be careful with debt consolidation

If a bank offers a better interest rate than the previous financial institution, the bank can even reject a loan termination. If the borrower unexpectedly receives a large inheritance and wants to use it to pay off the loan early, the borrower is dependent on the bank's goodwill. If the bank agrees, not only will the remaining balance become due, but also a prepayment penalty. You can find further information on refinancing old loans in this specialized article.

Can the prepayment penalty be deducted from taxes?

If you repay the loan for your owner-occupied property earlier and the bank thereby incurs a loss of interest, which it charges you in the form of a prepayment penalty, these costs usually cannot be deducted for tax purposes.

However, if you as a landlord have taken out a construction loan to buy a rented property, the interest can be deducted for tax purposes as income-related expenses. This is because there is an economic connection between the interest and the income from letting and leasing (Section 9 (1) sentence 3 no. 1 of the German Income Tax Act (EStG)).

Furthermore, it is possible to list the prepayment penalty in the tax return as income-related expenses, because the penalty is a usage fee for the loan. The decisive factor is that the loan was repaid early due to refinancing. However, if the property was sold, the prepayment penalty cannot be taken into account for tax purposes as income-related expenses (Federal Fiscal Court [BFH], judgment of February 11, 2014, ref. IX R 42/13). This is because the payment of the penalty was caused by the sale and not by the letting or leasing—according to the case law of the Federal Fiscal Court (BFH, judgment of December 6, 2005, ref. VIII R 34/04).

If you sell your rented property within ten years of purchase, the profit must be taxed (speculation tax). The prepayment penalty cannot be listed under income-related expenses in the tax return, but it can be considered as disposal costs.

This allows the taxable capital gain to be reduced (§ 23 para. 1 sentence 1 no. 1 EStG). The proceeds from the sale become taxable, so the expenses incurred in connection with the sale can reduce the income tax.

Conclusion on early repayment penalty

„Look before you leap“ also applies to real estate financing. These are long-term loans that typically come with a fixed interest period. The structuring of loan agreements can vary, which is why it is advisable to consult an expert to have the calculation of the prepayment penalty resulting from contract termination reviewed. Even if the lending institution is fundamentally entitled to a prepayment penalty, the demanded amount is by no means necessarily correct. Furthermore, there may be formal errors in the contracts (e.g., faulty cancellation policy), which can allow the prepayment penalty to be avoided altogether.

If you find that you have wrongfully paid compensation to the bank, you can demand the refund of the amount already paid – plus interest. This applies if the credit institution provided inadequate information in the contract regarding the calculation of the prepayment penalty or calculated it incorrectly.

However, you should keep the limitation period in mind. As a rule, it is three years, calculated from the end of the year in which the prepayment penalty was paid. Contact us and our partners will help you with the prepayment penalty.