Early Termination of a Real Estate Loan without an Early Repayment Penalty

To finance the purchase or construction of a property in Germany, the persons concerned often conclude a real estate loan agreement (also called a credit). This is a consumer loan agreement and is standardised in Section 491 para. 3 of the German Civil Code (BGB):

Consumer credit agreements relating to immovable property are non-gratuitous credit agreements between a trader as lender and a consumer as borrower if

1. they are secured by a mortgage or by a charge on land or

2. they are intended to serve the acquisition or the preservation of the property right to plots of land, to existing buildings or buildings yet to be constructed, or the acquisition or preservation of rights equivalent to real property.

While the borrower has secured the financing for their project, for now, the lender requires collateral security. If, for any reason, the borrower fails to pay off the previously contractually agreed instalment to the lender, the lender is thus secured. Collateral in rem can be the registration of a land charge or a mortgage. If a land register entry is agreed upon as security, there is the possibility of foreclosure in the event of non-payment by the borrower and, thus, a breach of contractual obligations. For more information on this topic, please look at our page “Foreclosure on real estate“.

The real estate loan agreement between the lender and the borrower accompanying the purchase of a property can often bind the parties to each other for decades. However, it should be borne in mind that the borrower’s life circumstances may have changed to such an extent that they may wish/have to terminate the financing for the planned or possibly already completed property prematurely. For example, this may be the case in the event of a divorce or a change of profession. Often, the proceeds from the sale of the property are used to repay the loan and thus to release the borrower from the loan agreement. However, the borrower must remember they committed to paying interest when concluding the real estate loan agreement. This interest must always be paid in addition to the borrower’s monthly instalments.

In the event of early termination, if the borrower owes payment of interest at the time of repayment, the lender suffers a loss caused by the early repayment. To compensate for this loss of interest, the institution or the bank can usually demand an appropriate early repayment fee (Section 502 (1) sentence 1 BGB).

If you have decided to terminate your real estate loan contract, you must first check whether you agreed on a variable or fixed interest rate with the other contracting party when you concluded it. If the former is the case, you may terminate the contract at any time – subject to a notice period of three months (Section 489 (2) BGB). It should be noted, however, that the termination is deemed not to have taken place if the outstanding amount has not been repaid within two weeks of it taking effect (Section 489 para. 3 BGB).

According to Section 489 para. 1 BGB, the borrower may terminate a loan agreement with a fixed debit interest rate in whole or in part under certain circumstances (special right of termination):

• The period of the debit interest rate commitment ends before the period determined for repayment (Section 489 (1) no. 1 BGB). If no new agreement on the debit interest rate has been reached either, the contract can be terminated subject to a notice period of one month. This is possible at the earliest on the day after expiry of the debit interest commitment.
• Ten years have passed since the loan was received in full. In this case, termination is possible subject to a notice period of six months (Section 489 para. 1 No. 2 BGB).

The repayment period of two weeks must also be observed in the case of the special right of termination (Section 489 para. 3 BGB). If you have not repaid the outstanding amount within two weeks, the termination is deemed not to have taken place.

The experts at the German law firm Schlun & Elseven will be happy to advise you on your termination plan, support you in implementing it and check the lender’s claims that may arise after submission of the termination notice.

If the withdrawal instructions are incorrect, it is also possible to withdraw a real estate loan. In principle, there is a statutory right of cancellation of 14 days for construction financing (Sections 495, 355 BGB). Regardless of this period/limitation, you can revoke a contract if you were not adequately informed about the right of withdrawal when the contract was concluded. In such cases, you can repay the loan without paying an early repayment penalty. In return, you will also receive the payments you made to the credit institution. However, bear in mind that the right of withdrawal expires after one year and 14 days at the latest (Section 356b (2) BGB).