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Home loan: fixed interest period and termination

In the case of real estate financing or construction loans in particular, it is customary for the interest to be fixed in the long term – the duration of the commitment is sometimes also called the fixed interest period or the fixed interest period. In Germany, fixed interest rates are much more common in construction finance than in other countries, such as the United States.

If the interest on the loan is fixed, this means that the borrower does not have to worry about changing situations on the financial market because they do not affect the interest rate during the fixed interest period. If the fixed interest period has ended, the loan is either repaid or follow-up financing is concluded.

Ordinary termination

Ordinary termination

Basically, in accordance with Section 489 (1) No. 3 BGB, the borrower has the right to terminate the loan taken out after 10 years or to repay it in whole or in part with a six-month period. This is a great advantage for builders, because, on the one hand, the borrower can protect themselves from rising interest rates using the fixed rate, but at the same time, after 10 years, they have the opportunity to find a cheaper loan if the interest rates have dropped. In such a case there is no prepayment penalty, the loan must have been paid back in full by two weeks after the cancellation.

There is also a right of termination for:

  • Sale / sale of the property
  • necessary expansion of the mortgage loan, but the bank rejects this extension and thus effectively prevents (economic) use of the property in question.

In the two cases mentioned, however, the bank has the right to a prepayment penalty. The BGH stipulates that the borrower’s ability to act (economically) must be retained, which gives various reasons to terminate the mortgage loan, including moving, over-indebtedness, unemployment, illness or divorce.

Does the fixed interest period make sense at all?

Does the fixed interest period make sense at all?

If the market interest rate level is low, a long-term fixed interest period makes sense. Builders who are interested in such financing should definitely check the interest surcharges that the bank demands – always keeping in mind that it is possible to cancel after 10 years without having to pay a prepayment penalty, even if the fixed interest period has not yet should have passed.