Early termination penalties: calculation, examples and alternatives

Did you sign a fixed-rate mortgage and rates have since fallen? Are you looking to sell your property or simply switch banks before maturity? You will likely have to pay early termination penalties. Here is how they are calculated, how much they cost, and when it is still worthwhile to break your mortgage.

What is an early termination penalty?

When you sign a fixed-rate mortgage, you commit for a fixed term (for example 5, 10 or 15 years). If you wish to terminate this contract before maturity, the bank suffers a loss of income: it had planned to receive interest at a certain rate for the entire contract duration.

The early termination penalty (also called "prepayment indemnity" or "Vorfaelligkeitsentschaedigung" in German) compensates for this loss. It can amount to tens of thousands of francs, or even more, depending on the mortgage amount and remaining term.

How are penalties calculated?

There is no single legally mandated method in Switzerland. Each bank applies its own formula, but the basic principle is similar:

The general formula

The penalty corresponds to:

• Outstanding capital: the mortgage amount still owed.
• Contractual rate: the fixed rate you are currently paying.
• Reinvestment rate: the rate at which the bank can reinvest the repaid funds. Generally based on swap rates or SNB placements for the residual term.
• Remaining term: the number of years (or months) until the original maturity date.

The SNB method

The most commonly used method is based on Swiss National Bank (SNB) rates. The bank calculates the return it would earn by investing the repaid capital in Confederation bonds for the residual term. The difference between your contractual rate and this investment rate forms the basis of the penalty.

In March 2026, with an SNB policy rate of 0.0% and very low bond yields, penalties can be particularly high for mortgages signed at higher rates.

Worked examples

Example 1: mortgage signed 3 years ago

Calculation: 800,000 x (2.80% - 0.80%) x 7 = CHF 112,000. This is a considerable amount, making early termination rarely worthwhile in this scenario.

Example 2: recently signed mortgage with a small rate gap

Calculation: 600,000 x (1.60% - 0.60%) x 4 = CHF 24,000. A more modest amount that could potentially be offset by savings from a lower SARON rate.

When is it worthwhile to break your mortgage?

The key question is: do the interest savings on the new contract exceed the penalty amount? To answer, you need to compare:

1. The total cost of your current mortgage until maturity.
2. The total cost of a new mortgage (at the current rate) + the early termination penalty.

The profitability calculation

Let's revisit Example 2: you are currently paying 1.60% and could obtain a SARON at 0.80%. The annual saving would be 600,000 x 0.80% = CHF 4,800. Over 4 years, that represents CHF 19,200 in savings -- insufficient to offset the CHF 24,000 penalty.

However, when factoring in the tax deductibility of the penalties, the calculation can change. If your marginal tax rate is 35%, the net penalty drops to approximately CHF 15,600, making the operation potentially profitable.

Cases where it is worth it

• Large rate differential: the greater the difference between your current rate and market rates, the more worthwhile the exit can be.
• Long remaining term: paradoxically, a long remaining term increases the penalty but also the future savings.
• High marginal tax rate: the tax deductibility significantly reduces the actual cost.
• Property sale: if you are selling, you have no choice. But the capital gain on the property can offset the penalty.

Alternatives to early termination

Before breaking your mortgage, explore these alternatives:

1. Wait for maturity

The simplest and least costly solution. At maturity, you are free to switch banks without any penalty. If your maturity is within 18 months, it may be wiser to wait and lock in a forward rate.

2. Blending (rate mixing)

Some banks offer to "blend" your current rate with a new, lower rate, creating an average rate below your current one. This technique avoids penalties but ties you to the same bank, and the result is often less favourable than a genuine switch.

3. A SARON mortgage next time

If you have been burnt by an excessively high fixed rate, consider a SARON mortgage for your next contract. It generally has no exit penalty (only a 3 to 6-month notice period), giving you maximum flexibility.

4. Check your contract clauses

Some contracts include penalty-free exit windows, penalty caps, or specific conditions (death, divorce, job loss). Read your contract carefully or have it reviewed by a professional.

Key points to watch

• Request a written calculation: before any decision, require a detailed, written penalty calculation from your bank.
• Compare methods: some banks use more favourable reinvestment rates than others. The result can vary significantly.
• Factor in taxation: penalties are generally deductible, reducing the actual cost by 20% to 40% depending on your tax rate.
• Don't overlook ancillary fees: mortgage note transfer, processing fees from the new lender, etc.
• Get professional support: a mortgage broker can negotiate with your bank and optimise the entire operation.