Shortfall interest charge(SIC): How it Works, What it Means

What Is Shortfall Interest Charge?

A Shortfall interest charge is interest that remains due after the borrower makes their monthly payment. Negative amortization can occur on certain adjustable rate loans. Negative amortization is the financial term for an increase in principal of a loan due to a failure to pay the interest on that loan.

KEY TAKEAWAYS

• A shortfall in interest occurs when interest accrued on a payment of debt is not covered.
• It may happen on a variable-rate loan when an interest rate cap restricts monthly payments to less than the total amount of interest otherwise due.

How Interest Shortfalls Work

Interest shortfalls can be a problem with adjustable-rate mortgages, where the interest rate is adjusted to the outstanding balance throughout the term of the loan. If the rate cap limits monthly loan payments, homeowners may pay less than actual interest. The unpaid interest will increase the outstanding principal of the loan. This is known as negative amortization.

Negative amortization will protect borrowers from shock that is associated with an abrupt increase in the ARM’s interest rate. However, it may take longer for the loan to be fully amortized. The equity in a home will decrease if interest rates rise. This is true even if the price of the property increases. To protect both the borrower and the lender, most mortgages include limits on interest shortfall. A lifetime limit is the maximum interest rate that can be charged on an ARM. The cap is applied to the entire mortgage term. This cap tells the borrower the maximum rate of interest they can pay for their loan.

Interest Shortfalls on MBS

Interest shortfalls can occur in the mortgage-backed security market when the interest paid is less than what was accrued due to mortgage prepayments. Interest shortfalls are caused by fees and expenses incurred on troubled loans that reduce the interest amount available for a mortgage-backed security. In the event of an interest shortage, interest is usually deferred. subordinate class is typically the first to suffer, while more senior tranches are repaid.

Shortfall interest charge (SIC) rates

Find out when the shortfall interest charge (SIC) applies for changes to income tax assessments, as well as the current SIC rates.

When SIC applies?

The shortfall charge was introduced on 29 June 2005 for income tax assessments of 2004-05 or later years. The SIC is a reduced rate of the general interest charge that was applied to income tax deficits before the assessment was amended.

The SIC is generally applicable from the date of payment for the understated earlier assessment to the day before the notification of the amended assessment. The amended assessment, or tax shortfall, and the SIC related to it are due within 24 days of the date the amended assessment was issued.

GIC will continue to apply to any tax shortfalls that are found in the amended assessments of 2003-04 or earlier income years, regardless of when they are amended. The GIC will be applied from the due date for the original assessment.

GIC also applies to original assessments, tax shortfalls, and associated SIC if not paid on the due date.

This link will download the file: ROSA in brief – shortfall interest charge (NAT 4920, PDF 221KB)This link will download a file

How Shortfall interest charge (SIC) is calculated

The SIC is calculated daily. The formula to calculate SIC can be found in section 280-10 of Schedule 1 of the Taxation Administration Act, 1953. The formula uses a base rate of interest and a factor for an uplift of 3%. Tax legislation defines the base interest rate as the Bank Accepted Bill Rate published by the Reserve Bank for 90 days.

The SIC rate changes quarterly, with the rates for the following quarter usually announced two weeks before the start of the quarter.

Quarterly Shortfall interest charge (SIC) rates

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