Hana's fixed rate at 5.0% ends in 2 months. She wants to overpay £40,000; her ERC-free allowance has £20,000 left, and a 2% ERC applies to any excess. If she overpays £20,000 now and the other £20,000 when the fix ends, roughly how much better off is she than overpaying all £40,000 now? Ignore compounding.
ERC avoided = 2% × £20,000 = £400. Extra interest from waiting = £20,000 × 5.0% × 2/12 ≈ £167. Net gain ≈ £400 − £167 = £233. About £400 ignores the extra interest, about £167 is that interest alone, and about £567 adds the two. Allowances are product terms and ERCs must be a reasonable pre-estimate of costs (MCOB 12.3.1R).
Forgetting the interest cost of waiting when comparing it with the ERC.
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