Fixed rate product early repayment costs

Summary

Allica’s fixed rate product is designed for customers who plan to hold their loan until at least the end of the fixed rate period. Extra costs may apply beyond our standard early repayment charges if you repay early and market interest rates have fallen. If you believe you may want to pay the loan back before the fixed rate period ends, then please consider carefully if a fixed rate product is appropriate for you. Please read the below carefully and if you have any questions do not hesitate to discuss them with Allica.

What is a breakage charge?

A breakage charge is a potential cost passed on to you by Allica if you repay your fixed rate loan agreement earlier than the end of the original agreed fixed rate period. 

This may apply if both the following happen:

1. You elect to repay your loan early or make a payment above the permitted yearly overpayment allowance; and
2. Swap market interest rates have fallen since you agreed the loan.

Why may Allica apply a breakage charge?

When you take out a fixed rate loan, Allica agrees to fix the interest rate on your loan for a certain period. Because Allica has offered you a specific fixed ongoing rate, while market rates will continue to move up and down, Allica enters into interest rate hedging agreements for its portfolio of loans. Should you elect to repay your fixed rate loan early, then Allica will incur costs associated with continuing to pay for the interest rate hedge.

What are the potential costs to repay my loan early?

Allica charges an early repayment charge (ERC) on all its loans. In most situations this early repayment charge will be the only charge to repay the loan early.

Allica’s fixed rate ERC’s are calculated on a sliding scale basis. For example, a 5% ERC fee will apply for exiting a five-year fix in year one of the fixed rate period, 4% for exiting in year 2, to 1% for exiting in the final year of the five-year fix.   

By way of example for the loan below:  

• £500,000 Loan Amount
• 25 Year Term
• Five Year Fixed Rate period 
• Fixed Rate of 8%

In Year 3 should you elect to exit your Fixed Rate you would pay: 

£486, 365.68 (Loan Balance) * 3% (Charge for exiting in the third year of a five-year fix) = £14,590.97. 

However, in the event that swap market interest rates have fallen from the date you agreed the loan, the ERC potentially does not then cover the ongoing cost to Allica of the interest rate hedging associated with your loan.

Keeping the same example above, with Allica having entered a hedging agreement at a 5-year market rate of 4.81%, then in the event of a 2% reduction in market swap rates and you electing to repay the loan fully in year three, Allica would continue to pay for its hedging agreement at 4.81%, being exposed to the decrease in the value. 

Therefore, when you repay your loan agreement before the end of the Fixed Rate period, if the ongoing cost of the hedging is greater than the standard ERC fee, Allica may charge the full cost of breakage instead of the standard ERC fee.

Using the loan parameters above, and a reduction in the interest rate hedging agreement swap market pricing from 4.81% to 2.81%, the cost to Allica if you repay early in this example could be up to £31,127.40, and Allica would pass this charge to you (but would not charge the standard ERC fee or any other early repayment charge).

Allica will provide an Early Settlement quotation upon request.