I am advised by the Central Bank that when credit institutions provide fixed rate mortgages to customers, they utilise wholesale funding at a fixed rate to match the fixed credit they provide to customers. If interest rates fall, credit providers may be locked into accessing wholesale market credit at a higher rate than they can charge customers in the current retail market. As a result, a cost arises which is covered through the charging of a break cost. In the current environment, interest rates have fallen, and as a result there may be a differential between the interest rate that the credit provider has locked into, some time in the past, for the funds supplied to customers and what they can charge to customers, for the remaining period of the fixed rate loan.
Section 121 of the Consumer Credit Act 1995 permits a mortgage lender to apply an early redemption fee in certain circumstances, which includes breaking a fixed rate contract.