Early repayment penalty: the three ways out of a German property loan

Last reviewed: 25 August 2026 · Reading time approx. 8 minutes

Selling a property, refinancing, merging two loans — these are exactly the moments when the bank presents a bill nobody budgeted for. Yet German law knows three ways out of a running loan on which no early repayment penalty (Vorfälligkeitsentschädigung) arises at all. This article sets out the position in Germany.

When an early repayment penalty arises at all

The claim rests on a single condition. Under § 502 (1) sentence 1 BGB the bank may, “in the event of early repayment, demand reasonable compensation for the loss directly connected with the early repayment if, at the time of repayment, the borrower owes interest at a fixed borrowing rate”. The decisive half-sentence comes last: a fixed borrowing rate at the time of repayment. All three routes below work on that lever — they take the contract into a state where the fixed-rate period ends, rather than breaking it.

Route 1: the end of the fixed-rate period

If the fixed-rate period ends before the date set for repayment and no new agreement on the borrowing rate has been made, the borrower may terminate under § 489 (1) no. 1 BGB — “subject to one month's notice, at the earliest with effect from the end of the day on which the fixed borrowing rate period ends”. This is the ordinary refinancing case: from that day the exit is penalty-free, before it is not.

Route 2: the ten-year right

The second route works in the middle of a long fixed-rate period. Under § 489 (1) no. 2 BGB the borrower may terminate “in any event after ten years have passed since full receipt, subject to six months' notice”.

Two details decide the date:

The anchor is full disbursement, not signing. Where the loan is paid out in instalments, the period only starts on full receipt.
A new agreement resets the clock: “if, after receipt of the loan, a new agreement is made on the repayment date or the borrowing rate, the date of that agreement replaces the date of receipt”.

So count from the day of full disbursement — or, if there was one, from the last agreement on the repayment date or the borrowing rate. The replacement loan has to be ready to draw at the end of the six months, not merely applied for.

The two-week trap. A borrower's notice “is deemed not to have been given if the borrower does not repay the amount owed within two weeks of the notice taking effect” (§ 489 (3) BGB). If the follow-on financing slips, the notice is not merely late — it counts as never given.

Route 3: a variable rate

On a loan with a variable rate the right of termination exists permanently: “at any time subject to three months' notice” (§ 489 (2) BGB) — an argument for not locking bridge finance on a property that is heading for sale anyway into a long fixed-rate period.

Route	Provision	Condition	Notice period
Fixed-rate period ends	§ 489 (1) no. 1 BGB	period ends before the repayment date, no new rate agreement	1 month, earliest from the end of that period
Ten-year right	§ 489 (1) no. 2 BGB	ten years since full receipt or since the last new agreement	6 months
Variable rate	§ 489 (2) BGB	variable borrowing rate	3 months
Early, with compensation	§ 490 (2) BGB	fixed rate, land charge, legitimate interest, 6 months since full disbursement	3 months (§ 488 (3) sentence 2 BGB)

Your contract cannot take these rights away. The right of termination under § 489 (1) and (2) BGB “may not be excluded or made more difficult by contract” (subsection 4). And unlike §§ 491 et seq. BGB, which apply only to consumer loan contracts, § 489 BGB speaks of “the borrower” without restriction.

If you have to get out earlier: § 490 (2) BGB

For everything before those dates there is exactly one statutory valve. Under § 490 (2) sentence 1 BGB a fixed-rate contract secured by a land charge may be terminated early “if his legitimate interests so require and six months have passed since full receipt of the loan”. Such an interest exists, sentence 2 says, “in particular where the borrower has a need to make other use of the object charged as security for the loan” — the sale of the property. The price is in sentence 3: compensation for “the loss it suffers as a result of the early termination (early repayment penalty)”.

A better rate elsewhere, by contrast, is not a legitimate interest — the rule attaches to realising the secured asset, not to the terms. For a fixed-rate immovable-property consumer loan, § 500 (2) sentence 2 BGB draws the same line: early performance during the fixed-rate period is possible “only if” the borrower “has a legitimate interest in doing so”.

The 1% cap does not apply to your property loan

This is the most expensive misconception in the field. § 502 (3) BGB does cap the early repayment penalty at “1 per cent of the amount repaid early”, or at “0.5 per cent” where less than a year remains. But the sentence opens with the words that decide everything: “In the case of general consumer loan contracts”.

And a property loan is precisely not one of those: § 491 (2) sentence 2 no. 6 BGB expressly removes immovable-property consumer loan contracts — under subsection 3 those “secured by a mortgage or land charge” or intended for acquiring or maintaining ownership of land — from the general consumer loans. So for the financing of a rental property there is no statutory cap. The compensation is measured by the loss, and with a long remaining fixed-rate period and a sharply fallen market rate that can be a multiple of it.

When the claim falls away entirely

§ 502 (2) BGB names two cases in which the bank can demand nothing: where the repayment “is effected from the proceeds of an insurance policy” the loan contract obliged the borrower to take out for exactly that purpose — and, more important in practice, where “the information in the contract on the term of the contract, the borrower's right of termination or the calculation of the early repayment penalty is inadequate”. Before negotiating the amount it is therefore worth reading your own contract; whether a clause is “inadequate” is decided by the courts case by case.

Do the maths before you give notice

Refinancing in the middle of a fixed-rate period only pays off where the interest saving up to the regular end of that period exceeds the compensation. An example — a pure model calculation:

Outstanding balance €240,000, fixed borrowing rate 4.2%, four years of the fixed-rate period still to run.
New offer: 3.0%. Rate difference 1.2 percentage points.
€240,000 × 1.2% = €2,880 saved in the first year.
Over four years therefore at most €2,880 × 4 = €11,520.

“At most”, because the outstanding balance falls as repayment proceeds. If the bank demands €14,000 in compensation, the switch loses around €2,480 even on this optimistic calculation — with the notary and land-registry costs of transferring the land charge not yet counted. What the interest block does to the running account is shown in the article on calculating property cash flow.

What the bank owes you

Two information rights from § 493 BGB help with the planning, both tailored to consumer loan contracts:

Before the fixed-rate period ends: the bank must inform you “at the latest three months before the end of the fixed borrowing rate period” whether it is prepared to agree a new fixed rate — and, if so, state the rate offered (§ 493 (1) BGB). That is tight for a solid competing offer.
Before an early repayment: if you notify the bank that you intend to repay early, it must without undue delay provide, on a durable medium, whether repayment is permissible, how large the amount to be repaid is and, where applicable, how large the early repayment penalty would be; assumptions must be “comprehensible and objectively justified” and disclosed (§ 493 (5) BGB).

Whether those rights apply turns on consumer status: a consumer under § 13 BGB is “any natural person who enters into a legal transaction for purposes that predominantly are outside his trade, business or profession”. Anyone financing through an asset-holding GmbH is not a natural person — §§ 491 et seq. BGB then do not apply, while § 489 BGB still does.

And for tax?

Interest on debt is a deductible expense under § 9 (1) sentence 3 no. 1 EStG “in so far as it is economically connected with a type of income”. Whether an early repayment penalty still carries that connection to letting depends on what the redemption serves — refinancing a property that stays let and settling a sale are not the same thing for tax. The Federal Fiscal Court has ruled on the sale case, see "What the courts have decided" below; clarify your own situation with your tax adviser before you give notice, not when filling in Anlage V. If a sale is on the table anyway, the speculative-period rules belong in the same decision.

The end of the fixed-rate period is a date, not an accident

RenoDiary reminds you six months before the fixed-rate period ends on every property — early enough to gather offers instead of signing the bank's renewal letter.

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What the courts have decided

Whether an early repayment penalty stays a deductible expense against rental income or becomes a cost of the sale is a question the Federal Fiscal Court (Bundesfinanzhof, BFH) has settled for the standard case of a sale.

BFH, judgment of 11 February 2014 – IX R 42/13

If a landlord repays a loan early in order to transfer a previously let property free of encumbrances, the early repayment penalty paid for that is not deductible as an income-related expense against income from letting and leasing. The original economic connection to the letting is displaced by the obligation to sell; from that point on, only the sale itself is decisive. Where the sale — as is usual outside the ten-year window of § 23 EStG — is not taxable, the penalty simply has no tax effect at all; only in a taxable disposal does it count among the costs of that sale. The practical consequence: refinance a loan while the letting continues, and the deduction survives; redeem a loan to sell, and the penalty should not be built into the running tax calculation.

Frequently asked questions

Can the bank exclude the ten-year right in the contract?

No. § 489 (4) sentence 1 BGB provides that the right of termination under subsections 1 and 2 “may not be excluded or made more difficult by contract”. Sentence 2 exempts only loans to public authorities.

Does the ten-year period start again after an unscheduled repayment?

The statute ties the restart to “a new agreement on the repayment date or the borrowing rate”. An unscheduled repayment already provided for in the contract is not a new agreement; where, on the other hand, the term or the rate is renegotiated on that occasion, that date replaces the date of receipt.

Does the exit also work for part of the loan?

Yes, § 489 (1) BGB allows termination “in whole or in part”.

What if I sell and the buyer takes over the loan?

Then there is no early repayment for § 502 (1) BGB to attach to. Whether the bank agrees to an assumption of the contract is, however, at its discretion.

Sources

§ 489 BGB (borrower's ordinary right of termination) — Gesetze im Internet (retrieved on 17 August 2026)
§ 490 (2) BGB (extraordinary right of termination, early repayment penalty) — Gesetze im Internet (retrieved on 17 August 2026)
§ 488 (3) BGB (three months' notice period) — Gesetze im Internet (retrieved on 17 August 2026)
§ 491 BGB (general and immovable-property consumer loan contracts) — Gesetze im Internet (retrieved on 17 August 2026)
§ 493 (1) and (5) BGB (information during the contractual relationship) — Gesetze im Internet (retrieved on 17 August 2026)
§ 500 (2) BGB (early repayment of immovable-property consumer loans) — Gesetze im Internet (retrieved on 17 August 2026)
§ 502 BGB (early repayment penalty, exclusion and cap) — Gesetze im Internet (retrieved on 17 August 2026)
§ 13 BGB (consumer) — Gesetze im Internet (retrieved on 17 August 2026)
§ 9 (1) sentence 3 no. 1 EStG (interest on debt as a deductible expense) — Gesetze im Internet (retrieved on 17 August 2026)
BFH, judgment of 11 February 2014 – IX R 42/13 (early repayment penalty on sale of the let property) — Bundesfinanzhof (retrieved on 25 August 2026)

This article offers general orientation for property owners in Germany and does not replace individual tax or legal advice within the meaning of § 3 StBerG. Deadlines and the legal position can change — the statutory wording, your loan contract and advice from a qualified professional are what count.