Fee Capitalization

Fee capitalization allows lenders to incorporate the fee directly into the loan's principal balance. When a fee is added to a loan, lenders have the option to capitalize it instead of collecting it with the next installment. Once applied, the fee immediately becomes part of the outstanding principal. As a result, future monthly installments are recalculated to account for this increased balance.

The main purpose of this feature is to ensure the fee is included in interest calculations and amortized over the entire loan term. This offers customers a streamlined way to add fees at various points during the loan, avoiding the need for complex and inefficient refinancing processes for frequent fee additions.

To enable fee capitalization on an account, the fee must first be set up and configured at the product level. Once a fee is available at the product level, the decision to capitalize it is then made at the moment the fee is applied to a specific loan. This is done by selecting the Capitalise checkbox on the fee application screen. You can also choose to backdate fee capitalization transactions, which will consequently adjust the interest amounts calculated for the period between the fee's application date and the current moment.

Fee capitalization will adhere to the threshold functionality configured at the product level. The fee capitalization threshold shares the same operational parameters as those used for interest rate changes and overpayments:

• PMT adjustment threshold (number of days)
• Threshold days method (calendar or working days).

Details about the threshold logic can be found here: Payment Modification Thresholds (PMT Thresholds).

Supported product configurations

Fee capitalization is available for specific product types and fee structures:

• Supported loan products: This functionality is available for Dynamic Mortgages and Equal Installment Interest Only Loans.
• Supported fees: Currently, only manual fees can be capitalized.
• Interest calculation compatibility: Fee capitalization works with loans that have both simple and compound interest calculation methods.

How it works

When a fee is capitalised, a new Fee Capitalization transaction type is created to log the amount applied. This capitalised amount is then incorporated into the loan's principal balance.

The interest computation will immediately reflect this new, higher principal balance. If the fee is applied between due dates, the interest calculation will be split into divisions:

• Division 1: Calculates interest based on the principal balance before fee capitalization.
• Division 2: Calculates interest based on the new principal balance after fee capitalization. If a fee capitalization transaction is posted as backdated, it will recalculate both the interest accrued and any interest from arrears accrued for the affected period.

Monthly payments (PMT) will be recalculated to account for the increased principal:

• For interest-only loans: PMT=PMT(IR/12, number of installments, closing balance after fee capitalisation, principal balance,0)
• For capital repayment loans (DBEI): PMT=PMT(IR/12, number of installments, closing balance after fee capitalisation)

The total principal shown on the loan schedule will reflect the full principal balance amount, which includes the capitalized fee.