Remaining Effective Cost (REC)
What is the Remaining Effective Cost or CER?
The Remaining Effective Cost (CER) is an indicator that tells us how much a loan or mortgage will actually cost us until the maturity of the operation, as long as it follows its normal course.
What are the differences between CER and APR?
The Annual Percentage Rate (APR) is the cost of a loan or mortgage over one year. Its calculation takes into account the term of the operation, the nominal interest rate, and the commissions and expenses incurred when contracting a specific operation.
The Remaining Effective Cost (CER) uses the same calculation formula as the Annual Percentage Rate (APR), but takes into account only and exclusively, in addition to the outstanding principal and the interest rate, the remaining term and the costs yet to be paid.
The APR, which is usually communicated at the time of contracting the loan or mortgage, informs us about the annual cost of the operation, while the CER is a variable figure over time that is provided after the operation is formalized and tells us the real cost of what we still have to pay, considering the outstanding term.
Since both the APR and the CER are expressed as a percentage, they allow us to compare different offers, serving as a valid market measure to determine which alternative is best.
How is the CER calculated for Abanca loan or mortgage operations?
To calculate the CER, the following will be taken into account:
- The outstanding principal
- The remaining term
- The interest rate applied to the loan/mortgage at the time of calculation until maturity. In variable rate operations, this rate will be used until the next review; from then on, and for the rest of the life of the operation, it will be simulated that the reference rate at the time of calculation remains constant at the last known level. In the case of loans/mortgages with a bonus, the bonused rate will be applied until the next review, if any, or until the date the bonus applies when single-premium payment products have been contracted at the time of formalizing the loan. From then on, the non-bonused rate is used until maturity. In these cases, we simulate that the client will not contract any product/service with the Entity (as it is voluntary), and therefore, the loan/mortgage does not receive a bonus.
Mandatory costs yet to be paid (not those already paid):
(i) Cost of the damage/home insurance being paid at the time of calculation and until maturity, provided it has been contracted with the Entity. If contracted elsewhere, it is not included due to lack of information.
(ii) Cost of the maintenance fee for the associated account being paid at the time of calculation, using as accrual dates the Friday following the 8th of March, June, September, and December.
Calculation assumptions:
(i) the loan/mortgage contract for the indicated amount remains in force for the entire agreed duration; (ii) the Entity and the Borrower fulfill their obligations under the agreed conditions and deadlines, so commissions and expenses that the client can avoid by fulfilling their contractual obligations are not included; and (iii) no total or partial early repayment occurs during the entire duration of the loan/mortgage.
Contracting products/services that allow for a bonus on the margin or interest rate implies assuming their costs, so it is possible that the CER in these cases is higher than it would be without contracting them.
Exclusions:
Commissions and costs already paid previously are not taken into account when calculating the CER.
Special cases:
- Considering that sometimes the fixed cost of certain products/services is included in the calculation, in operations with short remaining terms or residual principals, the reported CER could be disproportionate (with percentages even higher than 20%).
- If the loan/mortgage is overdue with an outstanding balance, the CER will not be reported.