What does a loan early repayment cost quote indicate?

The story

Maggie wanted to refinance her home loan.  Maggie’s loan with Pine Tree Finance was on a fixed interest rate term and Maggie knew there could be an early repayment cost.  Maggie called Pine Tree Finance and asked what the early repayment cost would be.  Pine Tree Finance said the indicative cost was $1,581.89.

About a fortnight later Maggie called again asking for a repayment figure.  Pine Tree Finance sent Maggie an indicative discharge notice advising the early repayment cost would be $150.  Maggie called Pine Tree Finance to check the early repayment cost was correct.  Pine Tree Finance confirmed the indicative early repayment cost was $150.

Later that week, on settlement day, Maggie discovered the actual early repayment cost would be $1,526.32. 

 

Dispute

Maggie complained to Pine Tree Finance.  She had expected the early repayment cost to be around $150 and could not understand how it could have increased by 10 times within the space of a week. 

Pine Tree Finance acknowledged it made a mistake on the indicative discharge notice, and in the follow up telephone conversation.  However Pine Tree Finance said it had originally quoted $1,581.89.  During the first conversation Pine Tree Finance was very clear it could only provide indicative quotes, and those quotes can change daily.

As a gesture of goodwill Pine Tree Finance offered to reduce the early repayment cost by $500.  Maggie did not accept the offer and referred the complaint to us, saying she would consider a reduction of $1,000.

 

FSCL’s review

We called Pine Tree Finance and asked whether it would be prepared to reduce the early repayment cost by $1,000.  Pine Tree Finance was confident of its position, saying it had recorded its telephone conversations with Maggie.  However in the interests of resolving the complaint it was prepared to reduce the early repayment cost by $1,000.

 

Outcome

Maggie accepted Pine Tree Finance’s settlement offer and the complaint was resolved.

 

Lesson

Early repayment costs may be incurred when a borrower repays a fixed interest rate loan before the end of the fixed interest rate period.  If interest rates have dropped between loan drawdown and repayment the lender may suffer a considerable loss.  Loan agreements allow lenders to pass on the interest rate loss to their customer in the form of an early repayment cost.

It is impossible to know for certain what the early repayment cost will be until the day the loan is repaid.  While lenders can give an indicative early repayment cost quote, borrowers should not rely on the quote too heavily.  If there is a movement in interest rates between the date of the quote and settlement day, early repayment costs can fluctuate by many hundreds or even thousands of dollars over a very short space of time. 

This case is a timely reminder to lenders and borrowers alike that an indicative early repayment cost may not indicate very much at all.