The first record of a structure here dates to AD 973 — a fort of the Obotrites, the Polabian Slav people who held this lake country long before any German prince did. An island in a large lake is a defensive gift, and they took it. In 1160 the fort became a target for noblemen pushing east under Henry the Lion, and Niklot's people burned it themselves rather than lose it intact. The conquerors saw what the Obotrites had seen, plus an aesthetic bonus, and began building again at once. The city of Schwerin was founded the same year, and a bishopric with it. In 1167 Henry granted the County of Schwerin to his vassal Gunzelin von Hagen while the surrounding country went back to Niklot's son Pribislav, beginning a hereditary ducal line that would last until 1918. The dukes bought the county back in 1358 and moved their household here from Mikelenburg, near Wismar.

Under John Albert I, Duke of Mecklenburg (1525–1576), a fortress turned into a residence. Defensive necessity gave way to ornament and comfort, much of it in the terracotta that dominated North German building of the period, shipped in from Luebeck. Between 1560 and 1563 John Albert rebuilt the palace chapel, taking his cue from churches in Torgau and Dresden; it became the first purpose-built Protestant church in Mecklenburg. Its early Venetian Renaissance gate, the gable carved with the carrying of the cross, is the work of the Dresden sculptor Hans Walther (1526–1600); biblical scenes on the northern windows are by the Flemish artist Willem van den Broecke. Even an island needed teeth. Bastions went up to the northwest, southwest and southeast around the middle of the century, probably by the Italian architects who worked under Francesco a Bornau on the Doemitz Fortress, and they are still standing. Ghert Evert Piloot's Dutch Renaissance rebuild began in 1617 and stalled almost at once when the Thirty Years' War arrived, resuming only in fragments between 1635 and 1643. In 1756 the court left for Ludwigslust.

The residence came back in 1837 to a building in poor repair and, to the grand ducal eye, embarrassingly incoherent. Grand Duke Paul Friedrich told his architect Georg Adolph Demmler (1804–1886) to remodel. A few months later his successor, Friedrich Franz II, stopped the work and demanded a complete reconstruction instead, keeping only some sixteenth- and seventeenth-century fabric. Gottfried Semper and Friedrich August Stueler both submitted plans and both were turned down; Demmler absorbed elements of each into his own scheme, then went looking at the Renaissance chateaux of the Loire, Chambord above all. Construction ran through the 1840s and 1850s, and the palace was inaugurated on 26 May 1857. Stueler, who took over from Demmler, added the cupola and an equestrian statue of Niklot — so the Obotrite prince who burned the earlier fort now keeps watch over the building that replaced it. Heinrich Strack of Berlin designed the interiors. Germans call the result the Neuschwanstein of the North.

On the night of 14–15 December 1913 a fire of unclear origin destroyed about a third of the palace, taking the Golden Hall and the main staircase with it. Only the exterior had been rebuilt when the revolution of 1918 ended the grand duchy. What followed reads like an inventory of twentieth-century German uses for a palace nobody quite needed: a museum, then from 1948 the seat of the state parliament, then from 1952 to 1981 a college for kindergarten teachers under the German Democratic Republic, then a museum again until 1993. Since late 1990 the building has once again housed a government — the Landtag of Mecklenburg-Vorpommern — and the decades since have been one long conservation campaign, largely completed by 2019. On 27 July 2024 UNESCO inscribed the Schwerin Residence Ensemble on the World Heritage List. A nineteenth-century fantasy has outlived every institution it was built to impress.

The ghost predates the current building, which is part of his appeal. Accounts of Petermaennchen do not agree: a long-bearded blacksmith in some tellings, a night watchman in others, a prankster in most. What the versions share is a job description. He rewards honest visitors and torments thieves and vandals, which makes him less a haunting than a security arrangement with unusually long tenure. Heinrich Petters carved him in 1856, mid-reconstruction, and the sculpture still stands on the palace, a small bearded figure looking down into the courtyard where the state's legislators now arrive for work. This is a building that has been burned, gutted, abdicated from, repurposed four times and restored for thirty years. Something here clearly does not want to leave.