Increased Costs Clauses: Why Your Loan Cost Can Change

In most loan agreements, the increased costs clause isn’t the bit anyone remembers. The eyes usually glaze over long before you get to it.

Nobody gets excited about it. Nobody spends hours negotiating it. Compared with pricing, covenants and security, it has all the glamour of a railway timetable.

Which is slightly unfortunate.

Because this is one of the few clauses that can increase the cost of borrowing after the deal has already been signed. You negotiate the facility. You agree the pricing. Everyone signs and moves on.

Then, perhaps months or years later, a lender appears with a notice explaining that the loan has become more expensive for them to maintain and they would like you to cover the difference. At that point, the increased costs clause suddenly becomes a lot more interesting than it looked during negotiations.

The logic behind it starts with how banks price loans.

When a lender commits to a facility, it isn’t just looking at the credit risk of the borrower. It’s also looking at the regulatory environment around the loan – how much capital it must hold, how much liquidity it needs to maintain and how much of its balance sheet the facility will consume.

Those factors shape the return the lender expects to earn. If the rules change, the economics can change with them.

Why Lenders Use Increased Costs Clauses

From the lender’s perspective, the argument is straightforward.