How much is the penalty for prepayment? The calculation method of penalty for prepayment
If the mortgage loan is adopted, the parties will agree with the bank on a certain repayment period. Within the period, a certain amount of loan needs to be repaid every month. If the loan is repaid in advance, it is a breach of contract. So, how much is the penalty for prepaying the mortgage? Let's take a look.
First of all, we need to know what the penalty is?
In order to limit prepayment, some lending institutions put forward a concept called substantive prepayment.
Different lending institutions have different standards for substantive prepayment, but it generally means that within 12 months, the borrower's prepayment amount exceeds 20% of the principal balance. Under this concept, some banks require borrowers to pay liquidated damages for prepayment.
How to collect the penalty?
The liquidated damages for prepayment are the terms recognized by both parties in the contract. Once the borrower pays off all the loan or most of the principal in advance within the specified time, the borrower will pay a sum of liquidated damages.
The penalty is generally calculated according to the percentage of the outstanding balance at the time of prepayment (generally 2% to 5%); or the interest for several months is stipulated. However, the maximum penalty is subject to contract or law.
The period of validity of liquidated damages is usually no more than 3 years (some are 5 years). After the expiry date, the penalty ratio will be cancelled, or gradually reduced, or only 1% of the balance. As long as the partial prepayment does not exceed 20% of the loan balance each year, there is no need to pay liquidated damages.
Liquidated damages can be negotiated by both sides. Generally, the lender will provide several options for the borrower to choose. If the borrower chooses the contract with liquidated damages, the lender will provide a lower loan fee or a lower loan interest rate. Generally, the interest rate of the contract with liquidated damages is 0.25% to 1.00% lower than that of the contract without liquidated damages.
Before prepayment, we should first check the requirements of prepayment in the loan contract, and pay attention to whether prepayment requires certain liquidated damages.
According to the time of prepayment, the major banks have different algorithms for liquidated damages.
Loan less than one year
Bank of China: if the loan is prepayed less than one year, the maximum interest penalty of no more than six months will be charged (calculated according to the loan interest rate on the prepayment date).
Agricultural Bank of China: if the loan is prepayed less than one year, it shall be charged by multiplying the principal by the monthly interest rate, which is the loan interest rate divided by 12 months minus the number of repayment months.
China Merchants Bank: if the loan is prepayed for less than one year, the interest shall not be less than 3 months of the actual repayment amount.
China Construction Bank: for the prepayment of loans less than one year, 3% of the prepayment amount will be charged.
Bank of Communications: it is stipulated that the minimum amount of partial prepayment shall not be less than 6 times of the monthly repayment amount, and the maximum amount shall not exceed 35% of the monthly repayment amount. Partial prepayment can be made once a year free of charge. All prepayers shall bear the penalty and charge 1% of the current repayment amount. However, the specific repayment amount should be implemented in accordance with the contract.
ICBC: if the loan is prepayed less than one year, 5% of the prepayment amount shall be charged as penalty. You can calculate the amount of liquidated damages for prepayment according to the time of your bank.
One year loan
Agricultural Bank of China: if the loan is prepayed after one year, as long as there is no prepayment record before, no penalty will be charged.
Industrial and Commercial Bank of China, Bank of China, Guangfa bank, Everbright Bank and Shanghai Pudong Development Bank: prepayment after one year of loan, without any penalty.
The liquidated damages for prepayment are the terms recognized by both parties in the contract. Once the borrower pays off all the loan or most of the principal in advance within the specified time, the borrower will pay a sum of liquidated damages. If you are in a complicated situation, we also provide lawyers' online consulting service. You are welcome to legal consultation.