Early repayment charge

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If fixed rate mortgages(FRM) are noticed in advance a compensation the so-called "early repayment charge" or "redemption penalty" has to be paid. If the interest rates have fallen, the creditor has an interest loss due to the notice. But if the rates are higher the creditor will gladly accept the early repayment or will even grant the compensation. The height of the compensation depends on the difference of the current rate to the rate of the loan and the period where the fixed rate is applied. Mathematical the early repayment charge is the net present value of all outstanding payments at the current interest rate minus the actual debt.

[edit] Notification

Lenders generally require borrowers to sign a form that they have been notified of an early repayment charge. Borrowers generally agree to a loan with such a stipulation to get better rates. Lenders prefer this because it gives them a guarantee for a certain amount of money from the loan. Without a penalty, a borrower could pay the full amount of the loan which is against the desires of the lender.

[edit] References

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