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Thread: How should you calculate a lender's cost for terminating a loan early?

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    How should you calculate a lender's cost for terminating a loan early?

    Recent UK legislation has made mortgage companies assess borrowers' ability to repay if (when) interest rates rise. Fair enough, but some lenders are applying these criteria when people who bought portable (transferable) mortgages want to move - even if they are downsizing. I'll assume that's a fault in the way the law was worded - otherwise why not terminate the mortgage on the same grounds even if the borrower doesn't move? And anyway, I'll bet the lender's books have already accounted for the risk of an existing borrower defaulting. That should have been built into the cost of the mortgage.

    What puzzles me even more is a statement from an association of lenders that they couldn't contemplate reducing or eliminating the often quite high termination charges for those who have to pay off a mortgage that was sold to them as being portable. Would some of the qualified accountant members of EP care to tell me what they believe are the allowable costs to the lender associated with early termination? The only ones I can think of are administration costs and an allowance for the time the associated capital is likely to be sitting around not earning until it is lent again.

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    I can't comment on Euro lending practices. In the US we call it a "prepayment Penalty." A reputable bank or a "good" loan, won't charge one. But it is one of the first things I check all the same. But they have gotten such a bad rap here that you don't see one anymore very often, and if you do, it's a good reason to either cross it out (Don't they love it when you do that!) or walk away. I'm speaking specifically of home loan mortgages.

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    Quote Originally Posted by dsieg58 View Post
    In the US we call it a "prepayment Penalty." A reputable bank or a "good" loan, won't charge one.

    ...

    I'm speaking specifically of home loan mortgages.
    In Canada, you will have to pay the pre-payment penalty if you are walking away and there is no means to do so without a penalty written into the contract. Often, if you are switching banks the new bank will pay the penalty on your behalf as part of getting your business.

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    Publishing Mentor dsieg58 is a Premium Member
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    if you are walking away and there is no means to do so without a penalty written into the contract.
    We may be speaking about 2 different things. So to clarify, I'm talking about "walking away" and NOT signing the contract, or not getting the loan in the first place. Not walking away from the loan once it has been granted. Once you've signed the contract, then the terms of the contract are the only things relevant. There is no walking away. (At least not without getting screwed for years afterwards.) And yes, same in the US, a new bank, if they want the business, will often pay, or you can have that added, or included in your refinance.

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    In France, and in the UK, I believe, some loan contracts have no charge for repaying the loan early. Others have unjustifiably high charges. But none so extreme as a company that leased photocopiers where I was working in Botswana - I wanted to terminate a 3-year contract after 2 years, and they said 'Sure. Just pay us next year's lease now as a lump sum'!!

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