Payout Figure: Why It Is Not the Loan Balance

A statement balance is a record of the past: principal outstanding at the close of a period. A payout figure looks forward to a settlement date and asks what will be owed on that day under every facility the security covers. The two diverge for ordinary reasons. Interest accrues daily and is charged in arrears, so on any day between payment dates some has built up. A fixed-rate loan repaid early may cost the lender money it is entitled to recover. And a business's security is usually all-monies, so the mortgage over the premises also secures the overdraft, the card facility and the bank guarantee issued to the landlord.

A lender will not release security against less than everything it secures, unless it agrees to. That makes the payout figure the gate a refinance passes through: until the figure is paid, the new lender cannot take first-ranking security, and its own funds stay where they are.

Each line has its own logic. Accrued interest is simple arithmetic. The break cost is the lender's estimate of what it loses by being repaid before a fixed rate ends: broadly, the amount repaid times the fall in wholesale rates since the rate was fixed, for the time left, discounted to today. If rates have risen there may be none, and agreements differ on whether a gain is ever passed to the borrower. For business loans the method is set by the facility agreement, so it is read there; many UK business loans charge a fixed percentage of the amount repaid instead. Where the rate was fixed with a separate swap, the swap is closed out at its market value, and if the bank's security is all-monies that cost is in the figure too, often the largest line. Contingent facilities, such as guarantees the bank has issued, cannot simply be repaid; the beneficiary has to release them, or the new lender issues replacements, or cash is left with the outgoing lender as cover.

The figure carries an expiry. Because the break cost moves with wholesale rates and interest runs every day, lenders state the date the figure is good for and often a daily amount to add if settlement is late. A figure that has expired is not a figure; it is a request for a new one.

A cold-storage business, constructed for this page like every figure in it, is refinancing to a new bank. Its term loan statement shows US$3.40m, fixed at 7.9% with eighteen months to run. The new bank has approved US$3.50m, sized on the statement. The outgoing lender's payout figure for settlement on 30 June reads:

The refinance was sized on a number that was not the price. The new bank can issue its own guarantee to the landlord, which takes US$150,000 off the cash needed, provided the landlord accepts it and returns the old one before settlement. The remaining US$63,568 has to come from the business or from a larger approval. If settlement slips to 3 July, three days at US$736 add US$2,208, and the outgoing lender will requote the break cost on the new date, so the figure is replaced rather than updated.

The figure is paid against the release it buys, and the mechanics differ by market. In New Zealand, settlement runs through lawyers' trust accounts and the electronic land registration system, with the discharge released as the funds are paid. In Australia, most property settlements now run through an electronic workspace, where the outgoing lender's figure becomes a line in the settlement schedule that every party signs off before funds and documents move together. In England and Wales, the lender's redemption statement says how it will discharge the charge at the Land Registry, electronically or by form, and the incoming lender relies on the borrower's solicitor's undertaking to redeem and send the evidence.

Personal property security is released separately. A lender holding a general security agreement over the business is asked for a release of its security interest and removal of its PPSR registration in New Zealand and Australia, or, in the UK, for a release that lets satisfaction of the charge be recorded at Companies House. A settlement that releases the mortgage but leaves the general security and its registration in place leaves the old lender's interest ahead of the incoming lender's over the business's other assets until it is released.

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For the incoming lender, the payout figure is a sizing input, not a settlement detail. A credit paper that approves a refinance at the statement balance has approved a different loan from the one that will settle. The careful file asks for an indicative payout early, before approval, lists every facility the outgoing security covers, and decides which are repaid, replaced or carried, and on what figure the condition precedent is met.

For the borrower, the figure decides the cost of leaving. A break cost can make a refinance that looks cheaper on margin dearer in total, and the arithmetic belongs in the decision before the application, not at settlement. For the outgoing lender, a figure that omits a secured facility leaves it holding security over money it may still be owed, and the dispute that follows lands on the lawyers who settled against it.

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