An Early Repayment charge is sometime levied on someone who wants to pay back the current mortgage to the bank. The reason that the bank can sometime charge this fee is because when you initially took out the original mortgage you agreed to pay the bank a certain amount over the next number of years at a certain rate of interest.
For example – If you borrowed 1 million shekels for 20 years at a 4% interest rate. Let’s say that after 5 years you won the lottery, and you decided that you want to pay the loan off early. This means that you really had another 15 years term to pay the mortgage. If the interest rate has now dropped to 3% you have caused a loss to the bank as they will have to re-loan this mortgage to a new client at a 1% lower rate. The bank will you charge the loss on the money that you caused them. This is called an early repayment penalty.
If however the interest rate is now higher than your interest rate then will be NO early repayment charge, as the bank will not lose money.
Most of the banks call this a penalty . Why ?
A penalty is normally associated with something bad that we have done like a car parking fine or speeding ticket. Is this the same penalty ?
No it is not. There is only a fine if the interest rate is lower than the interest rate that we originally took out. This means that the current available mortgage tracks are better than i originally received. An Early Repayment Charge is not a penalty. It is just another factor that you must consider when refinancing a mortgage.