The Costs of Ending a Mortgage Early Explained

Property owners with fixed-rate mortgages rejoice when market interest rates climb far above their locked-in rates. But when interest rates fall, many of these borrowers gripe about paying fixed interest that is much higher than market rates.

People with long-term mortgages, in particular, often wonder whether it is possible to replace their existing fixed-rate mortgage with a cheaper one, and how they should go about this.

Unexpected changes in the borrower’s circumstances, such as those caused by illness, disabilities, divorce, or bankruptcy can also be a reason for withdrawing from a mortgage ahead of schedule.

The costs of ending your mortgage early

A fixed-rate mortgage guarantees that you will always pay the same amount of interest for the duration of the mortgage agreement’s term. If you decide to end your mortgage before the agreed term is over because market interest rates have gone down you will normally be charged an early termination penalty fee.

The exact opposite is also possible. If you withdraw from the contract when current interest rates are higher than your contract’s fixed interest rate, the bank may pay you compensation – if your mortgage agreement specifies this.

The penalty fees for terminating a mortgage contract ahead of schedule can easily total tens of thousands of francs. For larger mortgages, the penalties can reach into the hundreds of thousands.

The bank may also charge administrative fees in addition to the early termination penalty fee,

But there are also more accommodating banks that only charge a flat, fixed early termination fee (1000 francs, for example). That is the case with some online mortgage providers.

How to calculate the early termination penalties

The early termination fee is normally prohibitively high so that withdrawing from a fixed-rate mortgage is financially painful.

The bank adds up the total amount of interest that they would have earned over the remaining mortgage term. The resulting sum total of all the remaining interest payments is the initial penalty fee.

The bank then calculates the interest that they can earn by lending out the returned money that is now available to them on the money market. The resulting amount is deducted from the initial penalty fee.

Example: 5 years into the mortgage term you choose to terminate a 10-year fixed-rate mortgage worth 1 million francs, with a 2-percent annual interest rate. The interest that the bank could earn by lending out the freed-up capital in the current market is 1 percent per year. In this case, the bank would charge you the 1-percent difference between the amount you agreed to pay and the 1 percent that they could get for the money now. So the final penalty fee would be 50,000 francs.

The early fixed-rate mortgage termination calculator makes it easy to calculate how much you would have to pay in penalties based on your specific situation.

When does terminating a mortgage early make sense?

If the amount of money you could save by exiting your fixed-rate mortgage ahead of schedule is bigger than the penalty fee, then terminating your mortgage makes financial sense. When calculating the penalties, you should also account for the fact that mortgage penalty fees are tax deductible in many cantons.

Important: When you sign a fixed-rate mortgage contract, you agree to pay interest at a fixed rate until the date on which the contract expires. Whether or not you can withdraw from the contract early, and which terms and conditions apply, depends entirely on the mortgage lender and the clauses included in your contract. You cannot influence how the bank calculates early termination penalties. For example, the interest rate that the bank claims they could get for reinvesting the money in the current market may be relatively low, which would result in a higher penalty fee.

Get a quote

A good first step is to ask your bank how much the penalty fee would be in your specific situation. It is important to understand that penalty fees are negotiable, just like the interest rates of new mortgages. Ask your lender to make you an offer.

If after trying to negotiate, you still feel that the penalty fees are disproportionately high, then using an independent expert or the banking ombudsman as an arbitrator can be an option.

Alternatives to penalty fees

If you are selling the property, there is also the option of transferring the existing mortgage to the buyer. You can choose to account for possible differences between the contract’s interest rate and current market rates for mortgages by discounting the property’s selling price.

If you buy a new property after selling your old apartment or house, you can ask your bank about transferring your existing fixed-rate mortgage to the new property.

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