Why the fee exists
When rates fall, borrowers want to refinance; lenders who funded at higher fixed yields lose expected interest (Schwartz & Torous, 1989; Stanton, 1995). A prepayment fee is one way to price that option, long studied in mortgage-backed securities (Dunn & McConnell, 1981). In Korea, the Financial Consumer Protection Act and supervisory guidance require clear disclosure of the rate, formula and waivers. Products like an overdraft line often treat early repayment differently.
Typical size and waivers
- Home loans often charge around 1% of the prepaid amount in the first 2–3 years, then taper.
- Unsecured loans follow a similar front-loaded pattern.
- Death, relocation or same-bank refinances may waive the fee under the contract.
Refinancing waves move with the policy rate and DSR caps (Campbell, 2006).
The economics
Prepayment is a call option for the borrower and a risk for the lender. Fees, lockout periods and partial-prepayment limits are frictions that shrink that option's value. Households should also rank high-rate debts such as revolving credit against the mortgage—see household debt and financial stability.
Checklist
- Highlight the fee rate, remaining-term formula and free-prepayment date.
- Ask whether a new loan resets the fee clock to zero.
- Check minimum partial-prepayment amounts.
- Review credit score and DSR effects of any refinance.
FAQ
- Will I owe a fee if I repay a mortgage after one year?
- Often yes in the early window—check your contract's waiver date.
- Can I move banks for free?
- Sometimes via same-bank deals or after the free period; free switches are uncommon.
Sources reviewed: 2026-11-06
References
- Dunn, K. B., & McConnell, J. J. (1981). A comparison of alternative models for pricing GNMA mortgage-backed securities. Journal of Finance, 36(2), 471–484. Classic work on how prepayment risk is priced into mortgages.
- Schwartz, E. S., & Torous, W. N. (1989). Prepayment and the valuation of mortgage-backed securities. Journal of Finance, 44(2), 375–392. Models borrower refinancing when rates fall.
- Stanton, R. (1995). Rational prepayment and the valuation of mortgage-backed securities. Review of Financial Studies, 8(3), 677–708. Analyzes rational prepayment and refinancing frictions.
- Campbell, J. Y. (2006). Household finance. Journal of Finance, 61(4), 1553–1604. Survey of how households choose mortgages, insurance and saving.
- 금융소비자 보호에 관한 법률. Korea's Financial Consumer Protection Act on disclosures and unfair terms.
- 은행연합회·금융감독원. (n.d.). 대출모집·중도상환수수료 관련 안내. Supervisory guidance on prepayment-fee disclosure and exemptions.
- Mian, A., & Sufi, A. (2009). The consequences of mortgage credit expansion: Evidence from the U.S. mortgage default crisis. Quarterly Journal of Economics, 124(4), 1449–1496. Shows how mortgage-credit booms shape defaults and the real economy.