Some of you may have seen an article recently regarding predicted and planned changes to redraw with some lenders.
Commbank have recently brought in these changes to their loans, which has confirmed that the article recently written is correct, (please see https://www.commbank.com.au/banking/changes-to-loan-repayments-and-redraws.html) and it is important that if you have and require access to redraw within your loan, that you are aware of these changes, particularly if you bank with the Commonwealth Bank.
How does redraw work?
When you first take out a home loan, the bank will calculate your repayments based on the loan limit being $0 at the end of the term – usually 30 years. For example, if your loan is $500,000 and your rate is 4%, then your repayments would be set at $2,387.08 per month. Whilst you make these repayments, the “loan limit” will reduce over time to ensure you can’t reborrow the funds and push your loan term to more than 30 years.
Let’s say you want to pay your loan off in 20 years instead. You would need to increase your repayments to $3,029.90, which would mean you are paying approx. $700 extra per month in additional repayments. These extra repayments (in most cases) will be available for you to “redraw” from your loan.
In the diagram below, the “loan balance” is how your loan reduces over time, and the “loan limit” is how the loan would naturally reduce if you were making additional repayments;
What the article is saying, and the changes CBA are implementing, is that at any given time they may “readjust” your repayments based on where your limit is at the time, thereby removing your redraw, and resetting your loan over the term. In the example of a $500k loan with extra repayments of approx. $700 per month, after 10 years of these extra repayments you may have redraw available of approx. $80,000;
If the bank “readjusts” your loan at the 10 year point, you may find that your redraw is lost, and your repayments have reduced. In this example, your loan repayments would reduce to $1,527 per month – you can request this adjustment at anytime currently.
- Why should I be worried about this?
If you like to have redraw for a “rainy day”, or are looking to invest/renovate etc.. losing this redraw could affect these plans. Also, if you reduce your repayments in line with the banks readjustment, you will end up paying more in interest than you would if you continue to make additional repayments
- What can I do to prevent this?
You can transfer your funds out of redraw into a transactional account, although beware that if the transactional account is not an offset account you will be paying interest on the funds you take out. There could also be tax implications to you doing this, so please ensure you discuss this with your broker or accountant before doing this.
- Not sure what to do next?
Feel free to give us a call! We are more than happy to discuss this with you in more detail to ensure the advice is tailored towards your particular situation.
