This document is a clause relating to early repayment of a loan. It is designed to be inserted into a loan agreement. The defined terms in this clause have the same meaning as those in the precedent called “Basic loan agreement”.
It would seem logical that a lender would welcome the situation where a borrower repays a loan earlier than expected. There should therefore be no need to include specific provisions in the loan agreement dealing with early repayment of loans. However, in practice many loan agreements set out processes to be followed in the event of early repayment of loans and in certain circumstances provision is made for an early repayment fee.
There are many reasons for expressly setting out the processes to be followed in the event of early repayment. For example:
- lenders’ administrative processes are often automated and therefore when a loan is provided, the loan amount and how it will be paid is entered into an automated process. Any changes made to the amount to be paid and the date on which amounts are to be paid may require manual intervention to override the automation;
- the lender’s cost of funds may be adversely affected where a loan is repaid early. Cost of funds is the interest rate paid by financial institutions for the funds that they deploy in their business. It is one of the most important input costs for a financial institution, since a lower cost will generate better returns when the funds are deployed in the form of short-term and long-term loans to borrowers. This matters not only from a profit earnings prospective (i.e. potential loss of interest earnings where a loan is for a shorter period of time) but also from a process perspective. This is where a lender may have to reorganise the packaging or warehousing of mortgage-backed security agreements with other financial institutions and investors.
Prohibitions to charging early termination fees
There are a number of prohibitions in relation to charging early termination fees. For example, Australian Securities and Investments Commission Regulatory Guide 220 “Early termination fees for residential loans” gives guidance as to when early termination fees would be:
- unconscionable under schedule 1 of the Consumer Credit Protection Act 2009 (Cth); or
- unfair under the Australian Securities and Investments Commission Act 2001 (Cth).
- Basic loan agreement
- Guarantee of payment of loan
- General security deed
- Real property mortgage
- Amendment and restatement agreement
- Deed of priority
- Forbearance of debt agreement
- Deed of assignment of debt
- Loan agreement checklist
This document has been authored for Lexis Nexis by Elise Margow, Principal, Legally Speaking.
This document is prepared with the assistance of Specialist Editors Geoff Geha, Partner, Clayton Utz and Karen Lee, Principal and Consultant, Legal Know-How.