Question: Last year I took out a home loan with one of the local banks. Recently, I approached another bank which offered me a better package for my current home loan. I decided to take up the offer of this bank but when I went to my other bank, besides the multiple efforts to convince me not to extinguish the loan, I was charged a hefty fine for closing the account ‘prematurely’. Can the bank do so?
Question: In 2011, I took out a loan with one of the local banks. Recently, I popped in another bank and was offered a very good rate for my current balance with the other bank. I decided to take up their offer and went to close my loan account with the other bank. When I informed my present bank that I would be refinancing my loan, the bank slapped a charge of €800 – had I closed my loan account from proceeds not coming from another bank (such as from inheritance), they would have charged me €100 only. I think this is grossly unfair and uncompetitive.
With regards to the first question, there is really nothing one can do because a bank may impose an early repayment charge if a loan is paid in full or in part before the time established by the agreement. The actual charge and the period until when it is applicable would be clearly indicated on the sanction letter or any other credit agreement.
The Home Loan Regulations (Legal Notice 415 of 2011) establish the bank’s obligation to provide the consumer with pre-contractual information that includes a list of related costs, such as administrative costs, insurance costs, legal costs, the costs of intermediaries and the conditions applicable (if any) in case of early repayment.
These Regulations also provide that in any home loan agreement, the bank is obliged to ensure that the agreement includes the consumer’s right to a reduction if he/she pays credit before it is due.
Nevertheless, the Regulations state that if costs directly arising from the credit agreement have been specified in the agreement and such costs are fair and reasonable, taking into account all relevant circumstances, the bank shall be entitled to a fair and objectively justified compensation for possible costs directly linked to early repayment of the loan so long as such early repayment falls within a period for which the borrowing rate is fixed.
The Regulations also allow for consideration to be given to the impact of early repayment on administrative costs irrespective of whether the borrowing rate is fixed or variable.
Even if a sanction letter gives a legal right to a bank to apply the charge, a bank might be able to reconsider its decision (effectively waiving its right to charge). Some banks for instance, do not apply an early repayment charge at all.
In regard to the second question, home loans issued prior to 1 January 2012 remain regulated by the Consumer Credit Regulations (Legal Notice 84 of 2005, as amended in 2007 and 2010). These Regulations do not specifically preclude a bank from applying a different structure of charges in the case of early repayment but it does require that such costs are fair and reasonable.
It is very questionable – perhaps also anti-competitive – if a bank charges a different fee purely on the basis of the way the loan account has been closed before maturity date. If this charge did not form part of the list of charges when the sanction letter was drawn up, the matter may be in breach of the contractual agreement apart from being in breach of consumer protection legislation. If the charge is an item on the list of charges on a sanction letter and the consumer accepted it, it remains to be seen whether that too may be in breach of consumer and competition legislation as it is unlikely that a bank incurs differentiated charges depending on the way the customer closes his loan account.
The Home Loan Regulations (Legal Notice 415 of 2011) in force since 1 January 2012 do not allow a bank to charge different early repayment fees depending on the manner the loan has been closed. Indeed, a bank is required to apply the same early repayment tariff to all its customers, irrespective of the reason given by the client for such early termination.
