Changes to Early Payout of Long-Term Loans
We have been refining our early payout (EPO) policies over the last few years with the goal of providing flexibility without negatively impacting other borrowers, damaging our cooperative borrowing program, or being overly administratively burdensome.
MFA loans are not like traditional bank loans or mortgages. Their unique structure, which allows for lower rates through pooled debenture borrowing and the benefit of actuarial credits, comes with added complexity to safely invest and manage the sinking funds, ensuring targets are achieved, and they are fairly administered.
When you make a loan request with specific instructions (e.g. amount and amortization period), we use that information to decide how best to finance the overall package of loan requests. This involves selling debentures to raise funds (5, 10 or 20-year terms), setting the actuarial rates and determining how principal payments are invested to meet actuarial targets.
If an EPO is requested on a 20-year loan at the end of year 10, the underlying debt must be reduced accordingly. Sinking funds that were invested out (assuming the funds were needed to repay debt in 20 years) need to be liquidated. This introduces volatility from potential gains or losses on those investments when sold, as we typically buy and hold investments to maturity in our sinking funds.
Requests for Early Payout
It is important to note that we are committed to a fair and transparent process. We must individually review each request and its impacts before approving any EPO. We consider the following factors when evaluating a request:
Timing – EPOs can only be processed at rate reset (refinancing dates), as we have committed to paying investors until the underlying debt matures. Debt and loans are not always perfectly aligned (we may refinance the underlying debt earlier than the posted loan refinancing date). The earlier you submit your request, the more likely it will be approved. We recommend sending in your request six months before the posted refinancing date.
Amount – The larger the request, the harder it is to unwind investment decisions without negatively impacting other borrowers. A large (or large relative to the rest of the loans in the issue) EPO could seriously impair the sinking fund for the remaining loans in the package. Please note that we do not accept partial payouts; we only accept full payouts.
Actuarial by Term – In 2023, we began setting actuarials by term. Before 2023, we used the same actuarial rate for all loans regardless of term length. The longer the term, the longer we have to invest; therefore, the higher the actuarial credit should be. The new methodology ensures better alignment; however, if a loan is paid out early, the borrower will have received a higher credit than they should have. If this happens, we intend to impose adjustment factors at early payout to make up the difference and avoid penalizing other borrowers.
Members wishing to EPO may have the opportunity to do so in full at a stated refinancing date for an Issue (indicated in your Loan Rates and Dates report in the Client Portal). Please note that partial paydowns are not permitted.
Members wishing to EPO must notify the MFA before the applicable deadline date (found in the Messages section of the Client Portal). We recommend that you send in your request six months in advance of the refinancing date.
Notice should be a signed request on letterhead advising the MFA that you wish to EPO your loan(s), and must include the following:
- Amount of early payout - the balance owing is the amount outstanding according to the amortization schedule at the refinancing date (after payment of the regularly scheduled principal and interest amounts)
- Method of payment – EFT pull by MFA
- Date of payment – must be the refinancing date
- LA Bylaw # -
- Issue # -
Clients must also complete and send a One Off Electronic Fund Transfer Form to the MFA before the applicable refinancing date. The form can be found in the Client Portal.
If you have any questions, please email finance@mfa.bc.ca.