Early Repayment of fixed-rate Mortgages - there is no free Lunch

German Mortgage Banks

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Date Published 2004
Primary Author Hans-Joachim Dübel
Other Authors
Theme Mortgage Products


Providing consumers with the right of early repayment of fixed-rate mortgages at little or no additional charge has been a long-standing demand of consumer groups in mortgage finance. But, given that investors in pools of fixed-rate mortgages face reinvestment risk for the funds they receive (do not receive) from prepayments, there can be no free lunch. Either the additional risk is reflected through an interest rate markup, which renders mortgage loans considerably more expensive – the situation in the US fixed-rate market. Or, to avoid higher rates, the lender adopts call protection strategies, e.g. by charging an indemnity – the situation in the European markets.

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