Early repayment penalty: the law, the calculation and when it does not apply.

What the early repayment penalty compensates

With a fixed-interest period the bank promises you a rate for many years and funds itself to match. If you repay the outstanding balance before then, it loses interest it had firmly planned on. The early repayment penalty replaces this interest loss. Some contracts call it a Vorfälligkeitsentgelt.

The legal basis for consumers is Section 502(1) BGB. It allows the bank to claim appropriate compensation for the loss directly connected with the early repayment, if at the time of repayment you owe interest at a fixed borrowing rate. Two things follow from this:

• Only with a fixed rate.A variable-rate loan can be terminated at any time with three months' notice under Section 489(2) BGB. No penalty applies.
• Only the loss. The bank may not add a surcharge or a fine. Whatever it saves in risk and administration costs through the repayment must be deducted.

When you may repay a property loan early

You cannot repay a property loan with a fixed-interest period whenever you like. There are three ways to repay early, and only one of them triggers a penalty.

• Termination right after ten years.Ten years after the loan was fully paid out you may terminate with six months' notice (Section 489(1) no. 2 BGB), without any penalty. This also applies if the fixed period runs longer.
• Legitimate interest. Under Section 490(2) BGB and Section 500(2) BGB you may repay early if your interests require it. The law expressly names the case where you need to dispose of the mortgaged property in another way, which mainly means selling it. You then owe the penalty.
• By agreement with the bank. Without a legitimate interest, the bank does not have to agree to early repayment. It can still do so, usually in return for a penalty whose amount is then negotiated.

You can repay part of the loan within agreed special repayment rights. How much per year is set out in your contract. The basics of the fixed period itself are explained in our guide on the fixed-interest period.

Check in four steps whether you pay at all

Whether an early repayment penalty is due is decided by the law, not by the bank. Before you discuss the amount, it is worth checking in this order. Each step can remove the penalty entirely or in part.

1. Step 1

   Has the fixed-interest period ended, or have ten years passed?

   If the fixed-interest period ends as scheduled, you pay no penalty. Independently of that, under Section 489(1) no. 2 BGByou can terminate with six months' notice ten years after the loan was fully paid out, even with a 15 or 20-year fixed period. If you later agreed a new rate, the ten years run from that agreement. The contract cannot exclude or restrict this right (Section 489(4) BGB).

2. Step 2

   Who terminated the loan?

   If the bank terminates the loan because instalments were missed, case law of the Federal Court of Justice says the borrower owes default interest but no early repayment penalty (judgment of 19 January 2016, XI ZR 103/15). The ruling concerned an older version of the law. For property loans the default rate today is 2.5 percentage points above the base rate (Section 497(4) BGB). If you terminate or repay yourself, this step does not apply.

3. Step 3

   Does the contract state the term, termination right and calculation sufficiently?

   Under Section 502(2) no. 2 BGB the penalty is excluded if the contract gives insufficient information on the term, your termination right or the calculation. The same applies if you repay from an insurance policy that the contract required as security (no. 1). Both BGH rulings from 2025 turned on this step, and it depends on the wording of your contract. How differently they ended is described below.

4. Step 4

   Has the bank deducted special repayments and saved costs?

   If no exclusion applies, the amount still needs checking. The bank must take agreed special repayment rights into account as if you had used them in full. The BGH declared a clause excluding this invalid (judgment of 19 January 2016, XI ZR 388/14, see the Federation of German Consumer Organisations). It must also deduct the risk and administration costs it saves.

Two Federal Court rulings from 2025, two outcomes

Two rulings of the Federal Court of Justice from 2025 show how much step 3 depends on the wording. In the judgment of 20 May 2025 (XI ZR 22/24), a savings bank's clause did not describe sufficiently how the penalty is calculated. The court made clear that missing or incorrect information on the calculation excludes the claim. The contract does not have to contain a financial formula, but it must state the essential parameters of the calculation. The bank had to repay the penalty.

The judgment of 21 October 2025 (XI ZR 187/23)concerned a different clause. The court found it sufficient, and the borrower got nothing back. Sweeping claims such as “most contracts are flawed” therefore do not hold. If you have already paid or are about to repay, have your specific contract checked.

How the bank calculates: two recognised methods

There are two recognised methods for calculating the early repayment penalty, and the bank may choose between them. The Federal Court of Justice has confirmed this in settled case law, most recently in its judgment of 20 May 2025.

• Asset-liability method (Aktiv-Passiv-Methode). The bank compares the interest you would have paid until the end of the fixed period with the return it earns by investing the repaid money in safe capital market securities for the same period. In practice, covered bond yields published by the Deutsche Bundesbank serve as the reinvestment rate. The difference is reduced by saved risk and administration costs and discounted to the day of payment.
• Asset-asset method (Aktiv-Aktiv-Methode). The bank assumes it lends the money to another customer. It is then compensated for the lost margin and, if new loans carry lower rates today, for the lower rate as well.

In the case of 20 May 2025 the bank had chosen the asset-liability method. Because the rate for safe investments is usually below the rate for new loans, the calculated loss tends to be higher. For your check this means: ask for the method, the reinvestment rate used and the deduction for saved costs. These three figures determine the result.

Worked example as a share of the outstanding balance

How high an early repayment penalty turns out depends on three factors: the outstanding balance, the time until the fixed-interest period ends and the gap between your contract rate and today's reinvestment rate. We recalculated the asset-liability method in simplified form. All figures are shown as a percentage of the outstanding balance, so they apply to any loan size.

Columns: gap between contract rate and reinvestment rate in percentage points (pp). Assumptions: annuity loan at a 3.5 per cent borrowing rate, instalment with a 2.5 per cent repayment share based on today's outstanding balance, annual payments, saved risk and administration costs of 0.2 per cent of the respective balance per year, discounted at the reinvestment rate, no special repayment rights. Own calculation by ME Finance, rounded. Banks calculate month by month and with their yield curve.

An example from the middle row: you have five years of fixed interest left, and your contract rate is one percentage point above the covered bond yield for that period. The penalty is then around 3.5 per cent of the outstanding balance. Without deducting saved costs it would be around 4.4 per cent. If the contract allows special repayments of 5 per cent per year, it falls to around 3.2 per cent.

You often read that the penalty is capped at 1 per cent of the outstanding balance. This cap in Section 502(3) BGB only applies to consumer loans, expressly to general consumer credit agreements. There is no percentage cap for property loans. How the outstanding balance develops during the fixed period is shown in our guide on annuity loans.

Early repayment penalty when selling a house

Selling the house while the loan is still running is a typical reason for an early repayment penalty. A sale counts as a legitimate interest. You may therefore repay early even if the fixed period has years to run (Section 490(2) and Section 500(2) BGB). In return you compensate the bank for its loss. Four points help to keep it small or avoid it:

• Check the timing. If the fixed period ends soon or the ten years since payout are almost reached, it can pay to align the notary appointment or the repayment with that date.
• Take the loan with you.With the bank's consent, the loan can be transferred to a new property if that is sufficient as security. Then nothing is repaid early.
• Takeover by the buyer.This also requires the bank's consent, and the bank will assess the buyer like a new customer.
• Use special repayments. If a special repayment right for the current year is still open, it reduces the amount on which the penalty is calculated.

After repayment, the bank releases the land charge. What needs to be done is explained in our guide on deleting a land charge.

Run the numbers before refinancing early

When rates have fallen, it is tempting to ask whether it is worth paying the penalty and switching to a cheaper loan. The calculation is simple: refinancing only pays off if the interest saved until the end of the old fixed period is higher than the penalty and incidental costs combined.

In practice this rarely works out, for a structural reason. The bank calculates its loss using the rate for safe investments such as covered bonds. A new loan, however, costs you a lending rate that is higher. The gap the bank applies is therefore usually larger than the gap you save.

Using the assumptions from the worked example, five years remaining and a 3.5 per cent contract rate: if the new loan is 0.5 percentage points cheaper, you save around 2.4 per cent of the outstanding balance in interest over five years. The penalty is around 3.5 per cent. Only with a rate advantage of a full percentage point do you get close, at around 4.7 per cent, and notary and land registry costs for transferring the land charge still have to be deducted.

It is usually cheaper to wait for the end of the fixed period and secure terms in advance. Our guides on forward loans and follow-up financing explain how.

Key takeaways

• The early repayment penalty only replaces the bank's actual interest loss, minus saved costs.
• Ten years after payout you can terminate with six months' notice, without any penalty.
• Insufficient information in the contract excludes the claim. Whether that applies to you depends on the wording.
• The 1 per cent cap does not apply to property loans. Remaining period and rate gap determine the amount.
• Refinancing in the middle of a fixed period rarely pays off. When selling, look at timing and taking the loan with you.

ME Finance is not a bank and does not give legal advice. We work out with you whether repaying early or refinancing pays off, comparing offers from more than 500 banks and lenders. Send us your key figures through our no-obligation enquiry.