BaFin

Questions & answers on loans

What documents do I have to submit to my bank when applying for a loan?

There are no statutory provisions on this. Normally, the documents submitted have to make it possible for the bank to assess the customer’s financial situation, i.e. his creditworthiness.

When specific documents are to be submitted is something decided by the credit institutions, and will depend on the loan type and amount. In the case of instalment loans, the credit institutions will frequently require proof of income (as a rule a copy of the most recent pay slips, or tax documents in the case of self-employed persons).

The higher the loan, the more important the collateral furnished will be. In the case of home financing, a borrower also has to submit documentation regarding the property financed so that the bank can assess what value the collateral (mortgage) has.

Is my bank also entitled to require me to submit documentation during the loan term for the purpose of reviewing my financial situation?

A bank also has to monitor the borrower’s financial situation during the term of the loan. If the information available to the bank is not sufficient for this, it may request further documents. Which specific documents are necessary is determined by the credit institutions alone and will depend on the type and amount of the loan in question.

Can I terminate my loan?

The question of whether a termination right exists is primarily governed by the contractual provisions. Consult your contract documents in this regard.

Independent of that, you may refer to the following case groups as guidance:

First case group - Loans with a fixed interest period shorter than the loan term, i.e. the fixed interest period ends before the loan is paid back in full.

You may not terminate such a loan before expiry of the agreed fixed interest period. Termination is possible only on expiry of the fixed interest period observing a one month’s notice (section 489 (1) no. 1 of the German Civil Code (Bürgerliches GesetzbuchBGB)). However, that does not apply if you have reached a new agreement with your bank regarding the interest rate.

Second case group - Loans with a variable interest rate, the interest rate agreed is not fixed but may change:

You may terminate such loan at any time observing three months’ notice (section 489 (2) BGB).

Third case group - Loans with a fixed interest period of 10 years and more:

This long-term loan may be terminated by you after 10 years have elapsed from the loan amount being disbursed (or from the time when a new interest rate is agreed) observing six months’ notice (section 489 (1) no. 2 BGB). In either case, termination is only possible after 10 years have elapsed, after which the termination notice of at least 6 months must be observed.
This also applies to loans secured by land charges or mortgages.

Fourth case group - Loans with a fixed interest period of up to 10 years and secured by a land charge or mortgage, such as real estate loans:

You are generally not entitled to early termination of such loans.

Exception: you have a justified interest in a different realisation of the thing used as collateral for the loan (e.g. sale or other encumbrance) requiring early termination of the loan agreement.

In such cases, though, the bank is entitled to a compensation for early termination pursuant to section 490 (2) BGB. (See also: Is my bank allowed to charge a compensation for early termination?).

Can I terminate my real estate loan and pay it back early?

In the case of a loan with a variable interest rate, the borrower may terminate it on three months’ notice; for loans with a fixed interest rate, he is generally not permitted to make early repayment before expiry of the fixed interest period.

A right of termination does however exist if the customer has an interest in a different realisation of the thing used as collateral for the loan (e.g. in the case of sale or other encumbrance) (see section 490 (2) of the German Civil Code (Bürgerliches GesetzbuchBGB)); in that case, the bank is entitled to a compensation for early termination as compensation (see also: How is a compensation for early termination calculated?).

By consequence, any other circumstances of the customer (e.g. inheritance, winning the lottery, unemployment, exploiting a lower capital market level), even though they may make early repayment of the loan appear possible or necessary, cannot be used as grounds for termination within the meaning of section 490 (2) BGB if they are not related to the realisation of the mortgaged property. This does not exclude the possibility of the bank allowing early repayment under circumstances, in which case it then does so on a purely voluntary basis without the customer having any legal right in that respect. However, the bank will then insist on receiving a prepayment fee as compensation (see also: What is a prepayment fee?).

May the bank terminate my loan?

The termination option for loans is normally governed by the contractual provisions.

As a rule, the bank is entitled to extraordinary termination if the customer’s financial situation has deteriorated significantly, if he is in default with repaying the loan (usually with arrears of two to three instalments), or if the value of the furnished collateral has deteriorated considerably. However, these are aspects that have to be carefully reviewed in the individual case.

What is a prepayment fee?

A prepayment fee (Vorfälligkeitsentgelt) is owed if a bank accepts early repayment of the fixed-rate loan even though the borrower has no right of termination. As a rule it is as high as a compensation for early termination, but the bank may charge a higher amount (which, however, must not be contrary to public policy, section 138 of the German Civil Code (Bürgerliches GesetzbuchBGB)).

The principles established by court rulings for calculating a compensation for early termination are not applicable.

If a high prepayment fee is charged, redemption by another bank would probably not be worthwhile (but repayment of the loan from the borrower’s own funds certainly would be – for example where he receives an inheritance or wins a lottery).

Is my bank allowed to charge a compensation for early termination?

If the borrower exercises his statutory termination right for a fixed-rate loan (section 490 of the German Civil Code (Bürgerliches GesetzbuchBGB)) and repays the loan in deviation from the agreed fixed interest rate period, the bank is entitled to a compensation for early termination (Vorfälligkeitsentschädigung) (section 490 (2) sentence 3 BGB). (See also: How is a compensation for early termination calculated?)

How is a compensation for early termination calculated?

In two rulings, the Federal Court of Justice (Bundesgerichtshof) has shown how to calculate a compensation for early termination (judgments of 1 July 1997 – case ref. XI ZR 197/96 and XI ZR 267/96):

  1. The difference between the contractually agreed interest rate and the reinvestment interest rate is to be determined.
  2. From this difference, the costs of risk saved have to be deducted because a reinvestment in fixed-income securities is entails less risk than a loan to customers.
  3. The calculation of interest loss is to include payments on the principal up to expiry of the fixed interest rate period.
  4. The calculated interest losses are to be discounted to the date of early repayment.

In a further ruling, the Federal Court of Justice recommended calculating the aforementioned reinvestment interest rate based on the returns of the capital market statistics of the German Bundesbank (judgment of 30 November 2004 – case ref.: XI ZR 285/03).

Since the Federal Court of Justice did not prescribe a fixed rate for calculating saved risk costs, holding that this depends on the individual case, the amount of the compensation for early termination may be disputed even where the credit institution strictly complies with the ruling of the Federal Court of Justice. It is therefore not possible to find "the" right compensation for early termination in a specific case.

In addition to a compensation for early termination, the bank may also charge a processing fee. On this point, the Federal Court of Justice holds as follows (judgments of 1 July 1997 – case ref. XI ZR 197/96 and XI ZR 267/96): "In addition, the bank may charge a reasonable fee for the administrative cost entailed by the loan’s early redemption. Since it is virtually impossible to calculate such cost exactly, the bank must perform its calculation by means of an estimate." Merely calculating the processing fee as a percentage of the (residual) loan amount is not considered to be objectively justified.

Readers versed in legal language may additionally refer to sources of the judgments mentioned:
Judgments of 1 July 1997, case ref.: XI ZR 197/96 and 267/96, published in WM 50/1997, pp. 2,340 et seq.
Judgment of 30 November 2004, case ref. XI ZR 285/03, published in WM 7/2005, pp. 322 et seq.

I would like to sell my property and offer may bank another property as collateral for the loan. Does it have to accept to do so?

The Federal Court of Justice has ruled that the customer may be entitled to exchange the agreed loan collateral without incurring a penalty (judgment of 3 February 2004 – case ref. XI ZR 398/02).

According to the criteria defined in this ruling, a borrower entitled to early redemption of his loan may request existing items of collateral to be exchanged if:

  • the collateral offered as replacement covers the bank’s risk just as well as the existing collateral;

  • the borrower himself bears the costs of exchanging the collateral, such as notary and land register fees; and

  • the bank does not incur any disadvantages in managing or realising the replacement collateral.

For such collateral exchange, the bank may not charge the borrower any compensation for early termination.