Fixed rate funding fees/early redemption penalties

[mrscharlie]

This has always niggled at me.

The funding fee/breakout fee/early redemption penalty that lenders charge is fair enough.

However, in instances where your fixed rate is lower than the current market rates the bank makes a profit as the fee is a negative figure. I know it's not that regular an occurance but it does happen and a zero fee is indicated.

If the customer is only being 'passed on' the cost of the funds, why aren't they 'passed on' the profits too? It could be discounted from the loan.

Has this just never been challenged or do some lenders actually do this?

 

[ClubMan]

However, in instances where your fixed rate is lower than the current market rates the bank makes a profit as the fee is a negative figure. I know it's not that regular an occurance but it does happen and a zero fee is indicated.

But surely the prevailing rate at that time is irrelevant to the rate at which the lender borrowed on the wholesale market in the past to fund the original fixed rate loan?

 

[mrscharlie]

But surely the prevailing rate at that time is irrelevant to the rate at which the lender borrowed on the wholesale market in the past to fund the original fixed rate loan?

I don't understand what you mean here, the prevailing rate vs the original rate is the reason for fee (or lack of fee).

 

[ClubMan]

I don't understand what you mean here, the prevailing rate vs the original rate is the reason for fee (or lack of fee).

OK - can you give a worked example clarifying what you mean (a) when prevailing rates are below the original fixed rate and (b) when they are above?

 

[mrscharlie]

OK - can you give a worked example clarifying what you mean (a) when prevailing rates are below the original fixed rate and (b) when they are above?

Not from memory but I used to work for a lender and had to apply the fees to any mortgages that were being redeemed/switching rates, which sometimes included having to explain the fees to customers that challenged them. I started there when rates were falling and levelled out at 2% and up to just around the time they started to rise again.

The fee was basically made up of the amount on the fixed rate, the no. of days left until that fixed rate expired, the cost (%) of the funds when the rate started vs the cost of funds on today's (the day of redemption) market. So the bigger the loan, the longer left and the bigger the funds cost difference, the higher the fee.

Obviously most people incurred a fee as the cost of funds was low at the time (so switching off say a 5% rate incurred a fee), but any new-ish mortgages that were redeemed around the time rates started going up in .25% increments were on very attractive fixed rates and the system showed a negative fee - there was no cost because the funds were initally secured cheaper than they could be at the time of redemption/switching.

I assume similar situations must be happening at the moment, some people would be on very attractive fixed rates from when the ECB was 2% and they may be breaking these rates to trade-up or switch lenders for other reasons and they're being told there's no fee and they probably think that's great.