26. 10. 2023

Charges for Early Mortgage Repayment Unlawful

This is what the Prague Municipal Court, acting as an appellate court found with final legal force (The reimbursement of interest costs charged by a bank for early repayment of a mortgage was illegal and constituted unjust enrichment). The respective reimbursement costs are very significant and typically amount to tens of thousands of crowns.

According to the court’s decision, the bank may only charge reasonable costs in connection with the early repayment of a mortgage loan.

The court thus confirmed the opinion expressed by the Czech National Bank (CNB) in respect of the consumer credit agreements for residential property under the Consumer Credit Act. It establishes the consumer’s right to early repayment of a mortgage loan. In such cases, only costs that are justified can be considered reasonable. These costs must also be directly linked to the consumer’s early repayment of the loan. They cannot therefore be costs already incurred in connection with the granting of the credit itself, even though they may not have been fully covered due to the early repayment. At the same time, there can be no loss of profit charged to the borrower, since loss of profit is not a cost that is reasonably incurred. The CNB’s position applies to loans granted after 1 December 2016 or for which a new interest rate fixation period started after that date.

The CNB’s practice has resulted in most banks on the Czech market charging the borrower-consumer only administrative fees of up to CZK 1,000 in the event of early repayment (including refinancing of the loan by another bank).

Nevertheless, there were several large banks that rejected the CNB’s position as incorrect and unlawful and continued to charge their customers high fees. Amidst a wave of refinancing of loans in 2017-2021 due to falling interest rates, banks did not want to give up tens to hundreds of millions of profit per year generated by these charges. 

The CNB imposed several fines in this context, but the fined banks challenged the penalties in the administrative courts and continued to charge their customers. In other cases, borrowers who had been charged when they repaid their loans early sued the banks to recover the amounts.

The court has now finally ruled on the first (or first publicly known) case in which a customer sought to recover from a bank the amount charged as unjust enrichment.

In this case, the bank calculated the interest costs at more than CZK 44,000. This was the amount the bank would have received as interest under the mortgage loan agreement until the end of the lock-in/fixed interest period. The bank argued that its costs were spread over the entire fixed term and were covered by interest payments during the regular repayment period. In the event of early repayment, where the client only paid interest on the loan until the date of early repayment, the bank would incur a loss. But the courts disagreed.

„The defendant itself stated that this was a kind of compensation for lost profits and not a duly incurred expense. As a business entity, the defendant bears the commercial risk of loss. Theoretically, it could have even made a ‚profit‘ on the early repayment and was therefore not entitled to interest costs,“ the court ruled.

The issue of early repayment is currently being addressed by the lawmakers. A pending bill includes a new rule on early repayment of mortgages. It would allow banks to charge customers up to two per cent of the outstanding principal for early repayment.

The argument for the new regulation is based on the banks‘ fear that if interest rates fall again, there will be another mass effort by mortgage borrowers to change banks to take advantage of the lower interest rates. Banks may then tend to recoup their interest losses through higher interest rates for all their customers, including those who do not take advantage of early repayment.   However, the proposed amendment to the law has also run into opposition from some members of the ruling coalition. Many of them do not see it as politically viable to promote the interests of banks at the expense of ordinary consumers. The fate of the amendment is therefore uncertain, but the maximum amount of the fee will almost certainly be reduced, probably to around 1 per cent of the outstanding principal.

By Mgr. Radek Werich

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Mgr. Radek Werich

Mgr. Radek Werich

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