Redemption fee

When a debtor/borrower chooses to pay off their debt to a creditor/lender, it is called repayment.

Repayment of debt to a bank, mortgage company or private company can generally be done early, on time or after the agreed time.

If a borrower chooses to repay their debt on time, it can usually be done without additional costs. If the borrower chooses to repay their debt early, this will often incur a repayment fee.

It's this redemption fee that we'll cover in this article.

Why a redemption fee?

As a rule, all debt can be repaid early if, for example, the borrower has more money than when the loan was taken out and wants to reduce their debt in full or in part.

It may also be that the borrower chooses to close the loan for other technical reasons, such as termination or conversion.

If a borrower chooses to repay their debt early, it will often result in a redemption fee to the lender (bank, mortgage company or similar).

The reason for the redemption fee is that the lender loses a portion of the expected interest and fee income that the lender would otherwise have received had the loan matured over the full term.

The redemption fee can therefore be seen as compensation for the lost revenue and as a way to make it less attractive to redeem the debt than if there were no fees.

Where can I find the repayment fees on my loan?

You will often find the redemption fees on your loan in the loan terms/loan documents that you signed when taking out the loan. These will often also be available in the bank or mortgage company's price overview on their website.

The redemption fee at most Danish banks and mortgage lenders is often stated as a fixed amount - for example DKK 750 - or as a percentage, for example 0.15%. In some cases, it can also be a combination of both.

This percentage is often referred to as a settlement commission.

Please note that not all loans have a prepayment fee and in certain situations a debtor/borrower can also negotiate the prepayment fee as part of the agreement when setting up the loan.

Which debts don't have redemption fees?

As a rule, there are only redemption fees on debt taken out with a bank or mortgage company.

Therefore, there are rarely any redemption fees on debts to private creditors, debt collection companies or lawyers, for example.

The reason is that creditors, lawyers and debt collectors aim to collect debts and don't want to penalize those who pay their debts in full or in part.

Partial redemption

A partial repayment will also incur a redemption fee, so you should carefully consider whether a partial repayment is worthwhile. The fixed amount, possibly combined with a percentage, can make up such a large part of the loan that a partial repayment is not financially advantageous.