Penalties for accelerated repayment of mortgages
The number of Dutch citizens who buy a house just across the border in Germany has continued to increase in recent years. The favourable housing prices and the low cost of living are the main reasons for moving to Germany. The influx of Dutch consumers on the German housing market has not gone unnoticed by Dutch banks. Many loans are provided by German subsidiaries of large Dutch banks, which are formed especially for Dutch consumers in the German housing market. Both Dutch consumers and Dutch companies then run into the German regulations concerning the financing of the acquisition and sale of property. It is very likely that Dutch house buyers in Germany will at some point start selling again, mainly in view of the fact that a Dutch citizen moves on average 7 times during his life and our German neighbours only 3.4 times.
However, most sellers do not take into account that the sale of their house means that the mortgage contract with the bank has to be terminated prematurely. This can have significant consequences for the selling consumer, especially in the case of fixed interest rates. Both German law and nearly all general terms and conditions applied by German banks consider the sale of a house to be a reason for terminating consumer credit early. The consumer owes the bank that provided the loan a penalty for early repayment of the amount that was borrowed. This fine, the so-called “Vorfälligkeitsentschädigung”, comprises the interest the bank will not collect on the borrowed amount and the administrative costs for terminating the contract. It regularly involves a considerable amount. A consumer who in 2009 took out an interest-only mortgage loan in the amount of €200,000 with a fixed interest of 5% for ten years, should take into account when selling in 2014 that he will owe a penalty of €30,000 – 40,000.
Dutch legislation does not provide for a penalty for early repayment of a loan and Dutch banks in the Netherlands rarely use penalty clauses.
Dutch banks with German subsidiaries, like the German banks, are entitled to a penalty towards the consumer on the basis of German law, without explicitly having included such in the contract. The economic risk of a Dutch bank that provides a loan in the German credit market justifies this penalty. The penalty can lead to a major residual debt for Dutch consumers, however. Moreover, many Dutch consumers are not aware of German regulations and an unexpected penalty and consequent residual debt can be a reason why a new loan is not provided.
Developments surrounding the “Widerrufsrecht”
Even fewer Dutch citizens are aware of the latest case law that offers a solution in most cases involving a penalty for early repayment. Not only consumers who wish to sell, but also consumers who wish to benefit from a lower interest rate by refinancing a loan, can effect dissolution of the contract without having to pay a penalty for early repayment. It may therefore be more economical, depending on the term and the fixed interest rate of a mortgage loan, to terminate the mortgage loan prematurely and conclude it again for the same house subject to different conditions.
This escape route is made possible by the right of withdrawal; the so-called “Widerrufsrecht”. Pursuant to European legislation, a right of withdrawal was included in many sections of German law, such as remote sales and door-to-door sales, in order to protect consumers. A right of withdrawal has existed for consumer loans since 2002. A consumer has the opportunity to have a contract dissolved within fourteen days of signing it.
If a consumer withdraws a mortgage loan, the contract will be dissolved with immediate effect. This withdrawal means in practice that the consumer has to pay the loan back in full within 30 days, for example by means of a new loan or by means of the purchase price received for the sold house. He does not owe the bank a penalty for early repayment, however, and can possibly benefit from a more favourable interest rate at another bank.
Banks are obliged to inform consumers about their right of withdrawal based on the aforementioned regulation. When the new regulation was introduced, the German legislator published a model form for providing information concerning the withdrawal of consumer loans, which may be used by the banks. A large number of banks and Sparkassen have nevertheless developed their own form and only use the model in part.
The use of a faultless information form is of crucial importance to the banks. The Bundesgerichtshof (BGH) – the highest German civil court – already decided in 2002 that the term for withdrawing a contract is only commenced by informing the consumer fully and faultlessly. This means that consumer loans can be dissolved many years after the contract was concluded as a result of the fact that confusing, incomplete or incorrect information was provided. In addition, in recent years, case law has placed the bar for banks ever higher as regards the duty to provide information towards clients. There is now a long list of words, formulations and rules for optical layout that the banks have to comply with as regards their information form. According to case law, even the model form does not comply with the duty to provide information to consumers. Banks who copied this form literally can invoke confidence in the accuracy of the model, however. Information forms that deviate from the statutory model are rarely upheld in legal checks.
This also means that for the majority of consumer loans, the term for withdrawing has not yet expired. Even if consumers have already terminated loans or paid the penalties for early redemption years ago, it is still possible to claim the amount paid back from the bank, invoking the right of withdrawal. The banks have since been provided with an unclear number of rules they have to satisfy. Moreover, new decisions are rendered all the time concerning the duty to provide information, which must be included in the information form.
The consequences for consumer loans become clear when studying the figures of a study published in June 2014 by the Association for Consumer Interests in Hamburg. These show that 80% of the 1,833 investigated files do not comply with the duty to provide information and can still be withdrawn by the consumers. Contracts from the period 2002-2009 in particular often contain several serious errors.
In practice, contracts are increasingly often dissolved on the ground of the right to withdraw. Many consumers opt for this route, especially with a view to the lower interest rates and extremely high penalties. The Association for Consumer Interests recommends in this connection, to engage a lawyer who can withdraw the mortgage loan with the bank. Considering the major economic impact on the banks, the banks are faced with the challenge of resisting unjustified dissolutions based on the right of withdrawal without running the risk of exemplary proceedings. At the same time, they must remain aware of all the new rules concerning the duty to provide information and repeatedly adjust their information form accordingly. It is often difficult to establish whether and what errors were made when drawing up the information form. This uncertainty can be used by both consumers and Dutch banks with German subsidiaries to reach a positive out-of-court settlement in disputes involving the right of withdrawal.