Terminating a mortgage early: what you need to know

There are many reasons to terminate your mortgage early. In this case, however, the bank will usually apply an early repayment charge. Comparis explains what an early repayment charge is, how it is calculated and when it is waived.

Elena Wetli Foto
Elena Wetli

21.04.2023

When repaying your mortgage early, it may be possible to save money.

iStock / AlexRaths

1.What is an early repayment charge on a mortgage?
2.When is the early repayment charge waived?
3.Repaying a mortgage early: when is it worth it?
4.What determines the amount of the early repayment charge?
5.Repaying a mortgage early: reducing costs

1. What is an early repayment charge on a mortgage?

If you decide to terminate your fixed-rate or SARON mortgage earlier than agreed, your bank will require you to pay an early repayment charge.

The reason? The bank invests the repaid mortgage amount on the capital market for the remaining term. This may result in a loss for the bank. It passes this loss onto the customer in the form of an early repayment charge.

The precise conditions relating to the early repayment charge are set out in the general terms and conditions of the framework agreement. Don’t forget to read the small print. Most banks will charge you for any loss of interest, but will not repay any interest gains to you.

2. When is the early repayment charge waived?

The early repayment charge may be waived if you are buying or selling a property. Specifically, this applies in the following cases:

  • Transferring the mortgage to a new property: If you buy a new home, you can transfer your existing mortgage to it. If you own another property, you can transfer your mortgage to that one instead.

  • Transferring the mortgage to a new owner: Your buyer may be interested in taking over your mortgage. You’ll need the lender’s consent for this. However, it is highly unlikely that a buyer will agree to pay the interest rate for this mortgage if a new mortgage is cheaper. If this is the case, it is worth paying the buyer the difference in interest so that they will agree to take over your mortgage. You also have the option of reducing the asking price.

3. Repaying a mortgage early: when is it worth it?

Are you thinking of taking out a cheaper mortgage and terminating the old mortgage earlier than contractually agreed? If so, you should take a close look at the figures. The interest you save must be more than the early repayment charge.

Are you staying with the same bank? It is then in the lender’s interest to accommodate you. Make it clear that this is about refinancing your mortgage. Remember: it is well worth comparing mortgages.

Calculate personal interest rate

4. What determines the amount of the early repayment charge?

The amount of the early repayment charge depends on the remaining term and the interest rate applied. A margin is also added. As a starting point, banks often use the interest they would have received for the remaining term of the mortgage. From this, they deduct the amount that they could obtain by investing the mortgage balance in the capital market. Note that the calculation method varies significantly depending on the lender, however.

Calculating the early repayment charge: can I do this myself?

It is difficult to work out a potential early repayment charge yourself. The reason for this is that: banks do not usually disclose the interest rate applied for the reinvestment of the mortgage balance. Contact your lender and ask them to calculate what costs you will incur. That way, you’ll be on the safe side.

5. Repaying a mortgage early: reducing costs

Ask your lender to disclose the costs involved and negotiate with them. You are in a better position to do this if you purchase other products from the bank. For example: you are repaying your mortgage early because you sold your house. Your bank is interested in you investing the money from the house sale with them. If you are a loyal customer, the bank is more likely to accommodate you.

Negotiating with a range of lenders entails a great deal of time and effort. If you are put off by the work involved or are not confident negotiating, you can contact specialists – for example at HypoPlus, Comparis’ mortgage partner.

Deducting the early repayment charge from taxes

If you are selling the property, you can include the early repayment charge in the investment costs relating to property gains tax. This reduces the taxable profit earned from the sale.

If you end your mortgage early in order to switch to a different type of mortgage with the same lender, you can deduct the exit fees from your taxable income on your tax return. You can read more on this subject in the article on mortgages and tax relief.

Problems with your mortgage lender?

You’re not entirely at the mercy of the mortgage lender. If you feel that the cost of refinancing your mortgage is excessive and negotiations have failed, you are advised to consult the bank’s arbitration service. You can also contact the Swiss Banking Ombudsman if necessary.

This article was first published on 08.06.2018

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