The Commonwealth Bank is changing the way the redraw facility works on their owner occupier and investment home loans. Some of our clients are struggling to understand the changes and have asked us to explain them more clearly.
A redraw facility is available on most of CBA’s principal and interest variable loans and allows you to access the funds you’ve paid in addition to the required minimum repayments.
CBA say they are changing the amount of available redraw to protect their clients from falling into arrears and from unforeseen or larger than expected increases in repayments.
There are two changes:
- Available Monthly Redraw – You can no longer redraw more than the minimum repayment due that month.
- Adjusted Redraw Balance – Your available redraw balance will now gradually reduce in line with the remaining life of your loan.
1. Available Monthly Redraw
From now on, only repayments made above the minimum monthly repayment amount will be available for redraw. This means a customer’s redraw balance will not include any repayments made towards their next minimum repayment amount.
Here’s an example:
- David has a loan with a minimum monthly repayment of $700 due on the 15th of each month.
- He makes random payments over the month totalling $700.
- He’d like to use the redraw facility to withdraw $99 to pay his monthly phone bill.
In the past he would have been able to do this but would then be in arrears when his monthly loan payment was due. Now he will not be able to withdraw $99 will not go into arrears with his home loan.
2. Adjusted Redraw Balance
The redraw balance will now gradually reduce in line with the remaining life of the loan.
The CBA will adjust the redraw balance after each month’s repayment. They’ve made this change to ensure customers do not redraw funds beyond what their original loan balance would have been if they had never made extra repayments.
Making extra repayments will still reduce the loan balance and contribute to the available redraw balance, however the available redraw balance will now reduce to zero by the end of the loan term.
Here’s an example from the CBA:
- Cara takes out a $500,000 variable rate home loan with a loan term of 30 years. She makes principal and interest repayments on her loan. The top graph shows how her home loan balance will decrease over time.
- In year 10 her loan balance is $408,000
- In year 25 her loan balance is $142,000
- However what if Cara makes a $200,000 additional repayment toward her loan in year 10, and continues to pay the minimum repayment to pay off her loan in 30 years? Her minimum principal and interest repayment will now reduce.
1 In year 10 her loan balance will be $208,000, while her available redraw balance will be $200,000. This adds up to what her loan balance would have been if she had made no additional repayment ($408,000).
2 In year 25 her loan balance would now be $72,000, while her available redraw balance has reduced to $70,000. This still adds up to what her loan balance would have been if she had made no additional repayment ($142,000).
These changes will happen automatically so CBA customers won’t have to do anything.
For more information contact us at Tick Finance.