Prepayment Penalty

A prepayment penalty is a fee charged when borrowers repay mortgages faster than the contracted schedule, compensating lenders for lost interest income during fixed-rate periods or lock-in terms.

Penalty StructuresCalculation
Percentage of balance1-3% of outstanding amount
Interest differentialRemaining fixed period interest
Declining scheduleReduces over time
NoneAfter lock-in period expires
Penalty ExampleAED 2M Balance, 3 Years Remaining Fixed
2% penaltyAED 40,000
Interest differentialAED 180,000 (3 years × AED 60,000)
Higher of twoAED 180,000 due
Avoidance StrategiesApproach
Variable rate selectionNo penalty typically
End of fixed periodWait until penalty-free
Partial prepaymentUse allowances without penalty
NegotiationRequest waiver for retention


Related Terms

Early Settlement FeePartial PrepaymentFixed Payment MortgageRemortgage

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