Read more about interest rate differential compensation
You can always redeem a mortgage early if you wish. However, you may not be able to do this without having to pay a fee. Everything is about what type of binding time you have. A mortgage that only has a floating interest rate (3 month interest rate) can normally be redeemed at any time at no cost. Should a lender be fussy they may require you to wait until the next period is over which is a maximum of 3 months. But normally you don’t have to pay anything.
However, should your mortgage loan be fully or partially tied at a time from 1 – 10 years, you will most certainly be able to pay something called interest rate compensation.
Why do you have to pay for a bond?
What makes a bond loan cost money to settle is that the lender usually borrows money himself which they then lend to you. They have then tied up this loan for the same period that you have chosen to bind the loan with them. Thus, lenders will have interest costs after you redeem the loan at the same time as no money comes in to them. Obviously, going with such a loss is not in the interest of the credit institutions and therefore, with the support of the law, they can charge a compensation called interest rate compensation.
Where is the lender entitled?
What the law says is that the lender is entitled to compensation for the loss they receive if you repay the loan early. Thus, you get to reimburse the lender for the interest they pay themselves when your money has been borrowed. Thus, it is not the loan institution’s profit that you should compensate, but only their costs.
It’s positive on the whole
Although it may sound negative that you have to pay money to settle a loan, we should be glad that interest rate differential exists. Had it not existed, the risk of a lender offering its customers long-term loans would have been much greater. And these companies usually manage the risks of raising interest rates to feel safer. Thus, we who borrowed money either had to pay a higher interest rate or it would not have been possible at all to tie up their loans.
How much is the interest rate difference compensation?
This is not possible for us to answer as it is different from case to case. If you want information on how much you should pay exactly, it is your lender that you should contact. They can answer this question.
After you have received this information, you can then make a decision whether it is worthwhile to settle the loan early or not.