Introduction to Prepayment Penalties
The prepayment penalty is a fee charged by the bank when a borrower repays their loan in full before the end of the agreed fixed interest period. The background is that in the event of early repayment of the loan, banks forgo a portion of the interest income they had firmly planned for. To compensate for this financial loss, banks demand compensation—the so-called prepayment penalty.
The amount of the prepayment penalty depends on several factors. The key factors are primarily the remaining balance of the loan, the remaining term until the regular end of the fixed interest period, and the interest rate agreed in the loan agreement. The amount of lost interest income and the current interest rate developments in the market also play a role. The longer the remaining term and the higher the interest rate, the higher the prepayment penalty usually is.
For borrowers, it is therefore particularly important to know the terms of their loan agreement in detail. Anyone planning to redeem their loan early should inform themselves at an early stage about the potential costs and be able to understand the calculation of the prepayment penalty. This way, unexpected fees can be avoided, and the financial impact can be better assessed.
Federal Court of Justice Ruling: Savings Bank Loses Entitlement to Compensation – Ref. XI ZR 22/24
A savings bank has lost its right to a prepayment penalty because the clause used in the loan agreement for calculating the prepayment penalty was not sufficiently clear and understandable for the borrower. The borrower can now demand repayment of the prepayment penalty already paid. According to statutory regulations, the lender must meet certain requirements in order for the bank to be entitled to claim compensation. This was decided by the Federal Court of Justice (BGH) in its judgment of May 20, 2025 (Ref. XI ZR 22/24).
For the early repayment of a real estate loan, banks and savings banks can generally claim a prepayment penalty as compensation for lost interest, provided that the bank actually suffers a loss due to the early repayment. However, the bank is only allowed to charge a prepayment penalty if the statutory requirements and conditions are fulfilled. This claim may lapse if the credit institution has not adequately informed the borrower about the calculation of the prepayment penalty. For instance, in its judgment of December 3, 2024, the BGH ruled that a cooperative bank lost its entitlement to a prepayment penalty because the clause used to calculate the compensation was inadequate (Ref. XI ZR 75/23). The same recently applied to a savings bank, according to the business law firm MTR Legal Rechtsanwälte, which advises, among other things, in banking law.
Real Estate Loan Repaid Early
In the underlying case, a consumer took out a real estate loan from a savings bank in the amount of around 135,000 euros—this loan amount was later repaid early. This case serves as an example of exiting a real estate loan through early repayment. The savings bank then demanded the contractually agreed prepayment penalty of around 7,600 euros for the lost interest earnings. The borrower paid the prepayment penalty under reservation but later filed a lawsuit for repayment because he considered the clause used in the contract for calculating the compensation to be intransparent.
According to § 502 para. 2 no. 2 of the German Civil Code (BGB), a credit institution may only demand a prepayment penalty if the contract sets out “clearly and understandably” how it is calculated. In the specific case, the borrower complained that the savings bank did not provide concrete details on how the calculation was to be made in its contract clause. In particular, the information on determining the loss and calculating the remaining amount (also referred to as residual debt) was found to be insufficient.
Calculation of the prepayment penalty not presented with sufficient transparency
The BGH ruled in favor of the plaintiff. The judges in Karlsruhe decided that the clause used did not meet the legal requirements. It was too general and lacked essential information necessary for the consumer to recognize the economic consequences of early loan repayment. Although section 10.2 of the loan agreement explains that the so-called active/passive method is used for calculation and that the early repaid loan amount is invested in secure capital market securities such as, for example, German Federal Bank mortgage bonds, there are various ways to calculate the prepayment penalty, such as the active/active method, whereby the credit institution calculates the lost interest based on alternative investment opportunities. In addition, prepayment interest may be incurred upon early repayment of a loan, which has to be paid in addition to the actual compensation. However, it is not set out clearly and understandably how the interest loss is calculated and how factors such as interest differentials, special repayment rights, or risk discounts are considered in the calculation.
This clause therefore infringes the duty of transparency and is consequently invalid. As a result, the legal basis for the savings bank’s claim to payment of a prepayment penalty no longer exists, so the borrower can reclaim the amount paid, according to the BGH’s decision. To better estimate the amount of the prepayment penalty in their own case, it is advisable to use a prepayment penalty calculator, which simplifies the calculation and increases transparency.
Banks’ and savings banks’ duty of disclosure
The Karlsruhe judges made it clear that it is not sufficient to refer generally to a calculation method for determining the prepayment penalty. Rather, an average consumer without legal or financial-mathematical background must be able to comprehend which factors are involved in the calculation and what financial implications an early repayment of the loan may have for them.
Since March 21, 2016, credit institutions have been required to inform their customers about the calculation of the prepayment penalty as well as the term of the loan and the borrower’s right of termination. For construction and real estate financings with a term of more than ten years, a statutory special right of termination exists after ten years, with a notice period of six months, allowing for termination without a prepayment penalty. If the institutions do not provide sufficient information, they lose their claim to a prepayment penalty in the event of early repayment of the loan. This is made clear by the BGH rulings on clauses that have been used by cooperative banks and savings banks to calculate prepayment penalties. Furthermore, other credit institutions may also have used similar inadequate clauses.
Prepayment Penalty and Taxes
In certain cases, the prepayment penalty paid can be claimed for tax purposes. This is particularly relevant if a borrower sells a rented property and repays the associated loan early. In such situations, the prepayment penalty can be recognized as income-related expenses (Werbungskosten) when declaring income from rental and leasing. This thereby reduces the overall tax burden, as the compensation paid decreases taxable income.
However, strict tax requirements apply in this context. The prepayment penalty can only be deducted if the loan was actually linked to the rented property and the payment was made as part of the early loan repayment. For owner-occupied properties, a tax deduction is generally not possible.
Borrowers should therefore carefully review the tax regulations and, in case of doubt, consult a tax advisor or financial expert. This ensures that the prepayment penalty is correctly recorded in the tax return and that no tax benefits are lost.
For borrowers, the rulings of the BGH mean that they may not have to pay a prepayment penalty when redeeming a loan early or may be able to reclaim a prepayment penalty they have already paid.
MTR Legal Rechtsanwälte provides advice on loans, prepayment penalties, and further topics relating to banking law. Comparing different offers for real estate or construction financing can help you find better conditions.
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