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What happens if the rate that applies to an outgoing lenders loan is different to the rates being offered by replacement funders? (i.e. What is the capital discount?)

The interest rate that applies to a loan withdrawn via an early access transfer may differ from the interest rate associated with the loan that replaces it. Consequently, the outgoing lender may receive less than the current face value of their loan.

For example, if the interest rate of a replacement funder’s lending order is greater than the interest rate on the relevant early access loan, we will discount the early access loan. This ensures that the economic return expected by the replacement funder (given the rate specified in their lending order) is met, and also means that payments under the early access loan remain the same.

For example, say an individual loaned $1,000 in the 3 Year Income market at a rate of 8% per annum. If, when they seek to withdraw their loan using an early access transfer, the prevailing interest rate in the market has increased to 10% per annum, we will use the capital discount to ensure that the lender who replaces them (at 8% p.a.) receives an economic return equivalent to 10% per annum. In other words, we would discount the value of the outgoing lender’s loan to ensure a fair return for their replacement.

Where an outgoing lender receives less than the face value of their loan following an early access transfer, they may be able to recognise the reduction in value of their loan interests as a tax or capital loss.

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