Commitment interest
Commitment interest (also provides entertainment interest or commitment fee ) are from banks with loans raised in the event that between the loan agreement a greater period of time should be provided for disbursement maturity and the actual retrieval of the loan funds.
Calculation methods
In banking practice, two alternative calculation methods are used, the creditable and the non-creditable commitment interest . The creditable commitment interest is only calculated from the unused part of the loan, while the non-creditable variant does not take into account any credit claims and is calculated from the loan amount. In the case of syndicated loans, the calculation of the commitment interest begins on the date of maturity for disbursement, i.e. when all disbursement conditions in the loan agreement have been met or, in the case of real estate financing, after a commitment interest-free period (between 6 and 12 months) from the start of the contract. The commitment interest is usually 3% per year (or 0.25% monthly).
Calculation practice
In the case of new construction projects and modernizations, the payment of partial amounts from the granted real estate loan is usually made later than, for example, a one-off payment for the purchase price of an existing property. In the case of a new building, the purchase price of the property and the construction costs are to be paid in installments based on the construction progress. As a result, there is a longer period of time between the date when the loan is ready for disbursement and the payment of the last partial amount, which can sometimes reach a year. In this case, the commitment interest is part of the construction period interest .
Frequent areas of application are medium or long-term bank loans, especially in the area of real estate financing , syndicated corporate loans (“ commitment fee ”) or stand-by loans .
Reasons for calculation
In the case of medium and long-term loans in particular, it is assumed that they will be refinanced by the credit institute in congruent amounts and terms. In the event of a contractually binding loan commitment , this means that the credit institutions will refinance this congruently (i.e. in terms of amount and in accordance with the term) and for their part receive the payment immediately. This immediate disbursement during refinancing cannot, however, be passed on immediately in the event that the loan funds are not called up in whole or in part when the loan is granted, so that a mismatch arises in the disbursement. Therefore, the refinancing funds disbursed immediately must first be invested at less favorable interest rates until the loan is called up. This interest rate disadvantage in comparison to the loan which is immediately fully paid off gives rise to the requirement of a commitment interest.
The EU-wide Capital Adequacy Regulation, which has been in force since January 2014 , contains a provision according to which unused commitments are regarded as unconditionally terminable if the contractual conditions allow the institution to fully utilize the termination options under consumer protection law and the related legal provisions (Article 154 No. 4b Capital Adequacy Ordinance). Loan commitments - with the exception of liquidity facilities for securitisations - with an initial term of up to one year must be backed with a credit conversion factor of 20% and loan commitments with an initial term of more than one year with 50% of the credit line with equity capital . Loan commitments that can be canceled at any time without reservation and without prior notice by the bank or that effectively automatically expire in the event of a significant deterioration in the borrower's financial situation receive a conversion factor of 0%. The backing of own funds is the further reason for the usual bank calculation of commitment interest.
Legal issues
Whether a service is interest or not does not depend on its designation (“fee, commission, expenses”), but depends on its real economic purpose. Therefore, remuneration for special services in the procurement and disbursement of capital, such as the so-called commitment interest , are not legally included in the interest . That is the reason why commitment interest is not included in the effective interest calculation of the Price Indication Ordinance . In the case of consumer loans, commitment interest is not taken into account as a price-determining factor for calculating the effective interest rate and is therefore not included in the effective interest rate. In terms of trade tax law, they do not apply as remuneration for debts within the meaning of Section 8 Paragraph 1 No. 1 Letter a) of the Trade Tax Act .
Permanent non-retrieval
If part of the loan is not needed permanently (e.g. because the construction project required less credit than originally planned), the loan amount can be reduced with the consent of the bank so that commitment interest no longer applies from this point on. In this case, however, a non-acceptance fee has to be paid to the bank for the part of the loan that is not required.