Most banks or financial institutions that offer credit facilities to the public have their prepayment interest or profit calculation methods, conditions and also the prepayment penalty clauses incorporated into the terms and conditions of the respective letter of offer and standard facility agreement to be used during the legal documentation stage.

An example of prepayment condition:-

Prepayment Conditions

How?

By paying an extra regular installment amount, e.g., principal, interest and taxes.

When?

On any regular payment date during the year with notification to the bank.

What It Means?

Principal Facility Outstanding Amount will be Reduced by that Amount.

As for the 'Prepayment Penalty' clause it is simply a clause stated in the respective mortgage or facility contract that says that in the event if the credit facility has been fully settled within a certain time of period, a penalty will be imposed. Typically prepayment penalty is based on a percentage, e.g., set between 2% to 4% of the remaining facility balance, or a certain number of months worth of interest but not exhaustive to these methods.

For example in a bank, the prepayment penalty practice can be categorised as follows:-

In view of the above, this function basically allows users create and maintain the prepayment and prepayment penalty schemes for application in different credit products for redemption purpose.

The prepayment and prepayment penalty scheme created in this function, will be tagged to the relevant product(s) for use.