Meanwhile my parents are stuck with their much higher 10% boom years interest rate, even though the absolute amount was much lower initially.
Of course this is in Europe, not the states.
So while mortgages have low interest, houses are expensive. To the point where you need a double income for a reasonable house.
My parents started off with a (iirc) 12.5% interest rate, but over the years were able to remortgage the house and eventually to a payment-free one (so they will never pay off the remaining balance on their mortgage, meaning they don't own the house (fiscally) and pay taxes on the monetary value it represents).
Even for a double income, it's insane. In NL, the average price of a home is 315k, while the median full-time income is 36k per year (pre-tax). Even with a double income, that's 4.5 years of household income, comparable to the peak ratio in the US before the housing bubble burst in 2008.
I live in Munich, and it's difficult to imagine that I can ever buy a house here, even with a relatively good salary.
Perversely, at least in the UK, a lot of people are paying higher rent than they would be for a mortgage for a similar place, but they can't get a mortgage due to "affordability", despite a demonstrated history of paying the rent.
Similarly, people can be on a 10% mortgage, paying it consistently, but unable to open a new, cheaper mortgage to replace it because their current circumstances don't pass the criteria. Criteria may include age (time to retirement) and current income.
Sure, interest rates may be lower, but the purchasing power (a.k.a how much does a dollar/euro get me?) has also declined dramatically over the last several years. If your parents are retired and on a fixed income, tax increases and insurance premium hikes are a major factor to consider as well.
Remortgaging is a normal part of life, but you can imagine that there might be penalty clauses if you've signed up for a 10 year fixed and in year 2/3 you want to remortgage at different terms.
However, I'm fairly certain that the GP is exaggerating. Even 15 years ago, no bank asked for 10%. 5% would have been a lot, something around 3.5 - 4% common. My parents paid between 7 and 10% when they built their house, but that's like at least 40 years now. Today, something around 2% is the going rate.
At least in the booming markets, however, the rise in prices has completely eaten the gain in interest. I could for the same monthly installmend pretty much finance the same size as I could 10 years ago, the interest rate would be lower, but the principal substantially higher.
Often consumers with weak credit or low incomes end up with loans that have worse terms, such as these penalties.
My family refinanced our home loan, and it was just a matter of going to the bank and signing the paperwork that they filled out for us. It took less than an hour, and the ROI was not hard to compute.
On an extreme example, imagine taking out a loan, then you pay it all back the next day. The loan has earned no interest, but the bank had to spend a bunch of time and money to get the loan set up.
Of course, early payment penalties are still pretty scummy. However, it does make sense why a bank would have one.
With consumer debt we have different expectations of what's fair, but consider the bank's risk profile here - if interest rates go up those outstanding mortgages are taking them for a ride, and if they go down the customers refi... seems natural they'd want to minimize prepayments.
An issue with consumer debt is that a proliferation of fees and "fine print" make it confusing for folks to understand what they're signing up for, and to do comparison shopping on loans.
Traditionally, folks were advised to be wary of prepayment penalties because of a widespread strategy to prepay a loan if possible. When interest rates were high, this was like an investment with a guaranteed percentage return.
For instance, my family took out a loan with a particular payment, but we paid more than the minimum each month because we could afford it. On the other hand, being able to drop back to a lower payment was a kind of safety net in case something happened to one of our jobs, or something like that.
See, the bank is not like your friend that lends you money. When your friend lends you money they are happy to receive payment early because they didn't actually want to lend it at all, it was a favor to you. They probably didn't charge interest, but if they did they did so because they "had to" (meaning they can't afford to lend you money as a flat out favor so they'll take the market rate, like when my friend the mechanic fixes my car but asks me to pay him because he's gotta live).
When the bank lends money they _want_ to lend it, it's the whole point of their business. That's why they exist, to charge interest. When you pay back early you're reneging on the deal, so to speak, and defeating the purpose of the business. They don't want the money back until the agreed upon time, it throws a wrench in their plans, budgets, forecasts, etc. The fee covers the cost of this inconvenience and discourages you from doing so.
Sometimes you’re able to refinance at no prepayment fee, but that comes down to how hard the bank wants to keep you as a customer etc.
If you get a standard 30-year fixed, the mortgage company can't impose a prepayment penalty.[1]
[1]https://www.nolo.com/legal-encyclopedia/when-are-prepayment-...