Avoiding penalties and lost interest payments when refinancing or selling real property and terminating loan agreement in Germany

If a house or an apartment was financed by a German bank or Sparkasse at a fixed interest rate for a fixed duration of the loan agreement, the loan agreement may be terminated early, if the property is sold. This is clearly stated in § 490 Par. 2 German Civil Code.


However, in case of an early termination of the loan agreement, the borrower will have to compensate the bank for the lost interest for up to the first ten years of the loan agreement due to the early termination (the socalled "Vorfälligkeitsentschädigung"). Interest that would be payable beyond the first ten years, does not have to be paid. For instance, if the loan agreement has a duration of eleven years and is terminated after five years, the bank has the right  for compensation in lost interest for outstanding five years. 


This lost interest payment can be avoided however, if the bank never advised the borrower as a consumer correctly about his/her right to withdraw from the loan agreement. If this "Widerrufsbelehrung" at the time of completion of the loan agreement was not fully (!) correct, then the consumer has an unlimited right to withdraw from the loan agreement - even after many years. This was ruled by the Bundesgerichtshof, the German Federal Court of Appeals, in 2009.

The reason for this is, that a withdrawal from an agreement is not the same as a termination of an agreement. A termination ends a contract that was in effect from now on with effect for the future. The termination has no effect on the regulations of the contract itself.


In contrary,  a withdrawal  from a contract means that the contract is treated, as if there had been no contract at all. Therefore the regulations of the contract no longer apply and never have, including the agreed duration of the loan agreement. Thus, due to the lack of an agreed duration, outstanding interest does not have to be paid.


An unlimited right to withdraw from the loan contract also exists until the consumer receives all the legal mandantory information about his/her loan. 


A loan agreement cannot be terminated simply for the sake of refiancing or getting a better interest rate somewhere else. However, if a withdrawal from the contract is still possible according to the aforementioned circumstances, then this can also be used to switch to another bank and refinance.


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