Prepayment Penalty: When a Fixed-Rate Mortgage Becomes a Disadvantage

The fixed-rate mortgage is considered a solid product in Switzerland. You know exactly what you are paying, down to the last cent, for five or ten years. But this reliability also has a downside, one that rarely gets more than a passing mention in advisory discussions: The contract binds not only the bank to an interest rate, but also the borrower to the contract. Anyone who wants to or has to exit early pays. And depending on the situation, they pay a lot.

Why a fixed-rate mortgage becomes expensive precisely when you want to get rid of it

Legally, a fixed-rate mortgage is not a product with a notice period, but a loan with a fixed term. Most contracts do not provide any option for early termination. Anyone who still wants to initiate an early exit must typically expect to pay compensation.

In practice, the bank almost always agrees to this. In return, it demands a prepayment penalty—depending on the institution, also called an exit fee, prepayment premium, or simply a penalty. The reasoning is economically understandable: The bank has refinanced itself for the agreed term. If the money comes back early, it has to reinvest it for the remaining term, and at the rate that is currently achievable on the money and capital markets. If this rate is lower than the agreed mortgage interest, the bank incurs an interest difference, which it passes on to the customer.

The triggers are rarely voluntary. Divorce, job-related relocation, extended unemployment, serious illness, disability, or the death of a partner are much more often the reasons for an early exit than the desire for a better interest rate. This makes the situation tricky: The compensation typically hits households at a moment when they are already under pressure.

How the prepayment penalty is calculated

Three figures determine the amount: the amount of the repaid mortgage, the remaining term, and the difference between the contractual interest rate and the currently achievable reinvestment rate for that exact remaining term. Multiply these, and you get the compensation. Most institutions add processing and settlement fees.

An example from the current interest period. In autumn 2022, a couple took out a ten-year fixed-rate mortgage of CHF 600,000 at 2.9 percent, a market-standard rate at the time. Today, in summer 2026, the remaining term would be about six years. The reinvestment rate for six years is currently around 0.6 percent, based on the current swap level.

Around CHF 83,000, plus fees. This is not an outlier, but the logical result of the fact that interest rates have fallen sharply since 2022. Anyone who locked in at the peak is now holding the most expensive version of this contract.

The linear multiplication is the upper limit, not the exact result. The bank receives the amount now in a lump sum, even though the interest charges would have accrued over six years. If the contract or banking practice requires, the compensation is discounted to today's value, i.e., a discount according to Article 81 Section 2 of the Swiss Code of Obligations. As a result, the effective amount is somewhat below the projected total, but at current interest levels, only by a few percent.

A comparison case shows the other side. If you locked in at 1.4 percent in 2025, the reinvestment rate will hardly be lower. The compensation is then small. If market rates increase significantly, the calculation may even turn out in favor of the customer. But in practice, this hardly ever happens: Most institutions exclude in their terms and conditions that such a rate benefit will be paid out, and keep the gain for themselves. Only a few providers pass a positive rate trend on to the borrower. Anyone who values this must look for it in the contract before signing; it can't be arranged afterwards.

The sore point: the reinvestment rate

The formula is simple, but the decisive figure is not. The bank determines which rate is used for the reinvestment. And it usually does not disclose it. VZ VermögensZentrum puts it clearly: Most credit institutions do not disclose to their customers at which rate they can reinvest the money, and often they add a margin on top. It is therefore worthwhile to request a transparent calculation and negotiate the amount of the exit costs.

How big the range can be is shown by a case from the archive of the Swiss Banking Ombudsman. During ongoing sales negotiations, a customer asked about the amount of the compensation and received an estimate of around CHF 3,300, which he factored into the price negotiations. Three weeks later, he was charged just under CHF 5,000 because in the meantime the bank had set a significantly negative instead of a slightly positive reinvestment rate. Any information given about the prepayment penalty is always just a snapshot. If you are relying on it, you should request it in writing with a validity date.

What the law says

Legally, the Swiss Federal Supreme Court qualifies the prepayment penalty as a contractual penalty—more specifically, as a so-called 'Wandelpön' under Article 160 Section 3 of the Swiss Code of Obligations (BGer 4A_567/2013 E. 5.2.3 and 4A_229/2007 E. 4.1). The logic behind it: By making the payment, the borrower is buying their way out of the contract. This has an uncomfortable consequence: According to Article 161 Section 1 of the Swiss Code of Obligations, a contractual penalty is owed regardless of whether actual damages have occurred. The bank therefore does not have to specify or prove their interest loss, and they are also not subject to a duty to mitigate damages.

If there is no contractual clause on early termination at all, things do not look better: The borrower then owes interest payments up to the end of the contract term as a pure fulfillment obligation. The Federal Supreme Court has so far left open or rejected a reduction on grounds of excessiveness under Article 163 Section 3 CO in 'Wandelpön' cases. In the cases decided, it denied a reduction because the compensation did not exceed the sum of the contract interest up to the end of the term.

In practice, this means: Those who have signed the contract rarely get a better deal through legal channels. The leverage is before signing, not after.

Taxation: Three scenarios, three results

This is where things get expensive for many property owners, because their expectations are usually incorrect. Since two Federal Supreme Court decisions on April 3, 2017 (2C_1165/2014 and 2C_1148/2015), the treatment has been largely clarified, and it is more restrictive than earlier practice in some cantons suggested.

Follow-on financing at the same bank. If the fixed-rate mortgage is paid off early and continued at the same institution under new conditions, the penalty counts as interest expense and is deductible from income. There must be a connection to the original mortgage.

Switch to another bank. No deduction. Anyone who switches for a better offer bears the penalty alone for tax purposes. It is exactly this scenario that makes many attractive refinancing deals unattractive after all calculations.

Sale of the property. Here too, no deduction from income. The penalty instead counts as an acquisition cost for the owner, comparable to a broker's commission, and can be deducted for the property gains tax. This reduces the taxable capital gain from the sale, but is of little use if there's little or no profit anyway.

Important: The property gains tax is regulated at the cantonal level, and even for income taxation, there are still differences in practice and transitional cases between cantons. The system described here reflects the position of the Federal Supreme Court, but does not replace a case-by-case assessment. Anyone planning an early termination of a fixed-rate mortgage should clarify the tax consequences in advance with a tax advisor, or, for larger amounts, even get a formal advance ruling from the relevant tax authorities.

What can be arranged in advance

The most effective measures are taken at contract signing, not at the time of exit.

Transfer instead of termination. If the buyer takes over the existing mortgage with its conditions, the compensation does not apply. If the contract interest is above the market level, however, the buyer will demand compensation. Alternatively, the mortgage can be transferred to a replacement property if you move and purchase another home. Both options require the bank's consent and are administratively complex, for example due to the debt certificates.

Stagger terms. Anyone who splits the financing into two or three tranches with different terms does not have to repay the entire amount early in a worst-case scenario. This significantly limits the potential loss.

Read the exit clause. The rules on extraordinary termination are in the contract or in the general terms. They differ between institutions much more than the interest rate. Some providers forgo compensation in the event of death or sale, others pass on a positive interest rate difference, many do neither.

Saron as a flexibility buffer. For Saron mortgages, switching to a fixed-rate mortgage with the same provider is possible at any time free of charge, and notice periods are comparatively short, so any compensation payments are much lower. Anyone expecting a transitional phase can secure flexibility with a Saron tranche.

Context in the current environment

The starting situation remains stable for now. On June 18, 2026, the SNB kept the policy rate unchanged at 0 percent, the same level as since June 19, 2025. Saron is slightly negative, the ten-year Swiss franc swap is around 0.7 percent, and ten-year fixed-rate mortgages are being offered at about 1.5 to 2.0 percent, depending on the provider.

For the prepayment penalty, this means two things: Those who took out a long-term contract in 2022 or 2023 now have a large interest rate difference working against them and should carefully calculate whether it makes sense to exit early. Those who have taken out a mortgage since 2024 have a better starting point because the difference between contract rate and reinvestment rate is small. And anyone signing a new fixed-rate mortgage today should consider the question that is almost never asked in consultations: Am I certain that I will still want this property and this financing in eight years?

Conclusion

From an economic perspective, the prepayment penalty is not a punishment, but the price for a promise that applies both ways. The real problem is not its existence, but its lack of transparency: The reinvestment rate is the one number that truly determines the amount, and it is set by the counterparty without needing to prove any loss. Anyone taking out a fixed-rate mortgage should compare the exit terms with just as much care as the interest rate. And anyone already locked in and needing to exit should request a detailed statement with the reinvestment rate specified, check the option of refinancing at the same institution, and clarify the tax treatment before signing.

This article is for general information purposes and is not tax, legal, or financial advice. The tax treatment of a prepayment penalty depends on the individual circumstances and canton of residence and should be discussed with a tax advisor in advance.

Sources

• UBS: Prepayment penalty, what does it cost to terminate a mortgage early
• Swiss Banking Ombudsman: Calculation of the prepayment penalty amount for early termination of fixed-rate mortgages
• Swiss Banking Ombudsman: Early termination of a fixed-rate mortgage
• VZ VermögensZentrum: The early termination of a fixed-rate mortgage can be very expensive
• NZZ Domizil: Is the prepayment penalty considered an interest expense?
• Thomas J. Wenger, Prepayment penalty and tax deductibility, sui generis 2017
• law.ch: Contractual penalty, excursus Wandelpön
• District Court Zurich, decision FV180107 of September 28, 2018 on prepayment penalty
• hausinfo.ch: Terminating a fixed-rate mortgage
• LUKB: Interest rate development and interest forecast
• BEKB: Interest rate forecast for mortgages
• hypothek.ch: Current mortgage interest rates compared