Do variable interest mortgage have penalties for unscheduled repayments?

Question

For mortgages, in the choice between fixed- and variable interest rates, fixed interest rates might be more expensive on average, but variable interest rates carry a higher risk (for example, see finanzcheck, mcmakler, or this question). For fixed interest mortgages, banks charge a prepayment penalty, so the borrower cannot (fully) exploit an increase in income to pay off the mortgage more quickly. How is this for variable interest mortgages? I expect an increase in income in coming years, so it would be interesting to increase our monthly payments; but this is not useful if the prepayment penalty is as much as the interest we would save by paying off the mortgage faster. Are prepayment penalties common or even allowed for variable rate mortgages?

According to the German civil code, §489, »The borrower may terminate a credit agreement with a variable rate of interest at any time«. Does this mean there is no prepayment penalty in this case? What applies to the case where I can't terminate the loan completely, but can still pay it off faster than planned?

I didn't find the answer in this article by the Verbraucherzentrale.

Answer 1

In AUT for example there are no penalties (normally around 1%) for so called windfall payments with a 'Variabler Kredit' - though keep in mind that even with a 'Fixer Kredit' you can arrange a lump-sum threshold (for axample 10k) to be paid back additionally each year on top of the regular payments without penalties - it just depends on your bargaining skills when setting up the mortage-contract with your bank and obviously varies between the institutes/banks.

In regards to 'the borrower may terminate..": It happened to me the other way around last year - I had a fixed interest mortage settled at 1.325 % and since the EURIBOR climbed into unexpected heights the bank chose to terminate and refinance my mortage since they would have lost quite a bit of money considering the current rate at which the banks get money on the market.. Bad for me - good for the bank, so always read the fine-prints in your contract before you sign anything..

"Does this mean there is no prepayment penalty in this case? What applies to the case where I can't terminate the loan completely, but can still pay it off faster than planned?"

With a 'Variabler Kredit' there shouldn't be any penalties - Lets say you have a 20 year mortage, win in the lottery in the first year and pay everything back - that should comply with the agreed terms of a 'Variabler Kredit' and no penalties should be applied. Currently it makes a lot of sense to pay windfall payments at the end of the year or every 3-6 month as soon as your account has filled-up again since the gap between EURIBOR and the interest rate for Giro-accounts is quite big ATM and you'll be better off NOT paying interest on lets say 10k than getting a low interst rate on your GIRO for that amount. Obviously exclude your emergency funds from that scenario..

When making windfall-payments you can choose to either decrease the monthly payback-sum or decrease the duration of the mortage. Since you said you'll make more money in the future it would make sense to decrease the duration rather than the monthly amount due. This adjustment should be free of charge..