GER: BGH Ruling on Early Loan Repayment Penalties

Jan 31, 2025 Benn-Ibler Rechtsanwälte

The German Federal Court of Justice (Bundesgerichtshof, hereinafter BGH) has recently ruled on the accuracy of information that must be provided when calculating early repayment penalties in consumer mortgage loan agreements.

In the event of early repayment of a loan to the bank, an early repayment penalty will almost always have to be paid. For this to be the case, however, the bank must have explained the payment of such penalties in a way that is understandable to consumers, and this must clearly be stated this in such contracts.

In the case at hand, the parties were in dispute over the repayment of such an early repayment penalty. The plaintiff had taken out a property loan for EUR 170,000 from his bank in December 2018 and signed a follow-up loan agreement for EUR 20,000 in November 2019. Then, the plaintiff repaid the loan early for which the defendant bank charged him an early repayment penalty. The plaintiff paid part of the amount claimed by the bank under reserve and then filed suit.

The court of first instance found in favour of the plaintiff and granted him a claim for repayment of the early repayment fee. However, the bank’s claim is excluded under Section 502(2)(2) of the German Civil Code (Bürgerliches Gesetzbuch, BGB). In the court’s view, the information on the basis of which the early repayment penalty was calculated is insufficient. The court ruled that the contract must contain clear and understandable information on the conditions and method of calculating the early repayment charge.

The BGH has now ruled and confirmed the lower court’s view. The disputed clause, which is based on the remaining term of the loan to be repaid when calculating damages, is insufficient.

Only the period of the legally protected interest expectation is eligible for compensation for the loss of interest incurred by a bank as a result of the early repayment of a loan by the borrower. A legally protected interest expectation exists until the agreed maturity date of the repayment claim or, if earlier, until the date on which the next permitted termination becomes effective, i.e. in particular until the expiry of any fixed interest period that may have been agreed, whereby the first opportunity for the borrower to terminate after ten years represents the upper limit.

The average, reasonably well-informed consumer understands the bank’s contractual terms to mean that the remaining term of the loan to be repaid refers to the remaining total term of the loan and not to the period of the legally protected interest rate expectation.

BGH, XI ZR 75/23 (3 December 2024)