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The information below is designed to give NAB customers a general overview of how early repayment costs (economic costs) are calculated and why NAB charges them. Please note that it does not replace or form part of a customer’s loan contract with NAB.
This information is also available as a brochure.
What is an economic cost?
Economic cost is NAB’s calculation of its loss on a fixed term loan due to movements in the cost of funds. This may occur, if before the end of the fixed rate term of your loan:
- The loan is fully repaid.
- A partial prepayment is made to the loan.
- The loan changes from fixed to variable or to another fixed term.
- The total outstanding loan amount is payable because you are in default and NAB is required to end the fixed rate contract early.
These are typically the customer driven events that trigger a significant change in the original fixed term of the loan by the customer and in turn potentially a sizeable loss to NAB.
Why does NAB charge an economic cost?
To understand why an economic cost is charged, you need to understand what happens when NAB lends you money to fund your loan. In order to lend money to you at a fixed rate for a particular fixed period, NAB typically borrows funds from someone else (e.g. other banks, small businesses, personal depositors) for the same period. The interest rate at which NAB borrows from the market to fund your loan is called the ‘cost of funds rate’.
Just as you have an obligation to repay NAB, we have an obligation to repay those in the market who lent us the fixed funding for your loan or to continue to pay the fixed interest on this borrowing. If you repay the loan before the end of its fixed rate term, we need to calculate the economic cost (if any) of breaking our own loan arrangements or continued use of these funds in another loan. NAB looks to recover the economic cost associated with the initial fixed loan from the customer in some circumstances.
When is an economic cost charged?
An economic cost may be charged when the current cost of funds is lower than the original cost of funds, which results in a loss to NAB when you repay the loan before the end of the fixed rate term.
No economic cost will be charged on home loans when you make a partial prepayment and/or increase your repayments, as long as these extra payments do not exceed $20,000 within the fixed rate term. This exemption however does not apply to Personal/Residential Investment Fixed Rate Interest Only loans or loans for business purposes.
How is the economic cost calculated?
Economic cost is based on a number of factors:
- The amount of the loan being repaid.
- The remaining fixed rate period.
- The contracted loan repayments.
- The cost of funds at the start of the fixed rate term of your loan (the ‘original cost of funds’).
- The cost of funds at the time you repay the loan (the ‘current cost of funds’) adjusted for the remaining fixed rate term of the loan.
How do I get an economic cost quotation?
If you are considering prepaying all or part of your loan during a fixed rate period, an estimate of the economic cost may be obtained by calling 13 22 65 or by contacting your Banker.
Please note: A quote will be valid for a period of 7 days only.
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