Paul Beevers welcomes the demise of the rule of 78
The rule of 78, which increases the amount borrowers have to pay on early redemption by adding the loan interest to the end of the term and then giving only a partial rebate of the future interest charges, is something that both borrowers and conveyancers need to watch out for. The attraction of the rule to lenders is clear, particularly as the windfall for the lender increases with the term of the loan and the rate of interest. However, in Evans v Cherrytree Finance Ltd (unreported, 13 April 2007), the High Court decided that a contract term which permitted a lender to use the rule to calculate a settlement figure fell foul of the Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083), and was therefore void.
Evans had borrowed £105,000 from Cherrytree, but when he wanted to redeem his mortgage 18 months later, a rule of 78 calculation gave the lender a windfall of £34,000 over and above the capital balance outstanding.
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