Mortgage loan: how are the penalties calculated for an early repayment?

Many French households (nearly a third of the population according to recent studies) currently have a mortgage in repayment, credit taken out to acquire real estate, whatever it is. These deadlines are spread over several years.

Why repay early?

The early repayment of a mortgage exists. This is the possibility of settling part or all of the outstanding capital. (the amount borrowed which has not yet been repaid).

Why choose this solution?

  • You have resold the financed good and must repay your credit,
  • you want to buy back credit
  • or you have touched a large sum of money which allows you to consider discharging your monthly payments from your credit.

There are several scenarios.

Is it legal?

Legally, the bank which granted you the mortgage does not have the right to refuse it to you. Your file must still be studied by the bank to know how and when.

On the other hand, it has the right to apply additional charges called the early repayment penalty (PRA) Where early repayment indemnity (IRA).

The conditions for early repayment and these costs are established, in the case of a mortgage, in the credit contract. They meet a regulated legal regime and cannot be set hastily or at the whim of the borrower or the creditor. The prior loan offer is clear on these conditions.

From when ?

The date on which you want to make this prepayment may influence the calculation of interest or prepayment penalties..

For example, if we pay the prepayment penalties on the same day that we pay its due date, this does not entail additional costs such as interim and additional interest.

What is a refund penalty and how is it calculated?

An early repayment penalty (PRA), also called in some banking institutions early repayment indemnity (IRA) is a charge that the bank applies to you when you want to repay your loan in advance.

It is in a way a “compensation” for the shortfall which the establishment will suffer, because there will be less interest.

These PRAs are valid for loans at fixed rates or at revisable rates., but with a different calculation.

  • For fixed rate loans, the law provides for these costs but also a very precise legal framework. The amount you have to repay must not be less than 10% of your initial loan amount.
  • This amount should not be more than 3% either of the outstanding capital nor be greater than the amount of six months’ interest.

For that, you will need to calculate the monthly loan payment multiplied by six and on the other hand find the sum you owe, of which we calculate 3%. The prepayment penalty is whichever is less.

Example. If you have taken out a real estate loan of € 200,000 at a rate of 3.50% for a period of 20 years.

You want to make a prepayment three years later, with a real estate rate at 1.60%.

Your outstanding capital is € 178,894.

If we calculate 3% of this sum, that gives 5,366.82 €.

If we calculate the interest for the next 6 months, with the rates, that would give a little more than € 3,000.

It is this amount that will be retained by your bank, because the lower of the two.

An exemption?

There are cases where you will not have to pay the PRAs for a loan which was taken after the year 1999. If the property is sold following a change in the workplace of one of the spouses, the forced stoppage of work of one of them following a dismissal for example, a complete cessation of activity or the death of one of them.