CBA redraws the rules on loans

New rules will affect how the Commonwealth Bank calculates loan repayments and redraw balances. Here's what you need to know.

Is the bank coming for your redraw?

If you're a Commonwealth Bank borrower you may have seen a note on your statement talking about changes being made to your loan. Or perhaps you've seen reports that the bank is coming to "sweep" your extra payments out of your loan. Not sure what it means? Read on.

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Commonwealth Bank is making changes to its mortgages and personal loans that affect how minimum repayments and loan redraw balances are calculated. These changes affect customers with variable rate principal and interest owner-occupied home loans, home investment loans or personal loans.

Changes to redraw come into effect on 1 September, while changes to minimum repayments took effect on 31 July.

As of 30 June 2018, CBA has $381 billion in home loan balances on the books. Three quarters of the bank's 1.5 million mortgage accounts are ahead on their payments - on average 32 months in front. That means there’s a lot of extra money sitting in redraw balances or offset accounts.

Just want to know the basics about mortgages? Check out our home loan buying guide.

Change 1: minimum repayment amounts

The first set of changes applies to the way your minimum repayments are calculated. The changes took effect on 31 July.

Minimum repayment amounts are the baseline amount the bank expects you to regularly pay back. Previously, making extra repayments on your loan meant you could pay if off faster – and pay less interest. Your minimum repayment amount would usually only change if your interest rate did.

Now, when you make an additional payment, your minimum repayment amount will decrease. Instead of paying the loan off faster, you can choose to reduce the amount of your regular direct debit repayments. The benefit is lower regular repayments (and more disposable income), but at the cost of a longer loan and higher interest costs.

Every loan is different, so let's take the example CBA uses on their website. Cara has a $500,000 30-year mortgage, and her minimum monthly repayment is $2752. After ten years she makes a lump sum extra payment worth $200,000. This reduces the balance of the loan, as well as the interest charged on it. Under the old rules, by continuing to make her minimum repayments she would pay the loan off 12 years early, and save over $200,000 in interest payments.

Under the new rules Cara will be able to drop her minimum repayment amount to about $1400 after making the extra payment. If she does this, it will still take her 30 years to pay down the loan, and she'll only reduce the total cost of the loan by about $120,000.

Note: we have used CBA's Standard Variable Rate Home Loan to make these calculations. It doesn't take fees and charges into account, and assumes a constant 5.22% p.a. interest rate.

Change 2: caps on redrawing additional payments

The second set of changes affects customers who've made extra payments on their loan, and wish to re-borrow (or 'redraw') some of it..

Previously, when you made additional payments on your loan, you could redraw some or all of the amount later on. Many people park their savings in a mortgage – by making additional payments above the minimum – and redraw it when needed. Instead of earning interest in a savings account, they can reduce the amount of interest they pay on their loan. As long as you keep up your repayments, you could redraw the entire amount of your additional payments and still end up paying the loan off early.

New rules will cap the amount you can redraw. You'll now be allowed to redraw up to the amount you would owe if you'd only made the minimum repayments. The calculation of this 'bare minimum' balance also takes interest rate changes into account.

This will affect people who reduce their repayments, as described in the section above. CBA says the new rules directly only affect a small number of people, but if you're toying with the idea of lowering your repayments you should pay attention.

Cara has a $500,000 30-year mortgage, with $2752 minimum monthly repayments. After 10 years she makes a lump sum extra payment worth $200,000. This brings her balance to about $208,000, and she reduces her monthly repayments to the new minimum, around $1400.

After 25 years, Cara's balance is $72,000 – if she hadn't made that extra payment, it would be $142,000. The bank will let her redraw the difference: $70 thousand, far less than the $200,000 she put in. So why did this happen?

Redraw caps have been brought in to stop people redrawing more than they can reasonably pay back. If Cara had been allowed to redraw the entire $200,000 with five years left on her mortgage, her monthly repayments would have shot up to more than $5000. This is due to her decision to reduce her monthly repayments.

Alternatively, if Cara maintains her original $2752 monthly repayments after putting away the $200,000, she will pay the loan off long before her 'bare minimum' balance gets low enough to threaten her redraw amount.

By year 18 she'd have about $20,000 remaining on the loan. She would be able to redraw the full $200,000 and continue to pay off the loan at the same monthly rate. Or, she could keep paying down the loan and close it early.

How will this affect me?

Repayment amounts: The bank will have recalculated a new, lower minimum repayment amount. You can choose to decrease your regular repayments, but it will mean your loan will take longer to pay off, and you'll pay more interest in the long run. Additional extra payments will reduce your minimum even further.

Redraw: If you choose to decrease your repayment amount, the amount available for you to redraw will gradually decrease. In this case you shouldn't be using your mortgage as a 'savings' account, as your available balance will erode.

If you want to keep the lower repayment amount, you should consider withdrawing most or all of the extra repayments you've made and putting it in an offset account.

If you increase your repayment amount, you can still keep your redraw balance. By setting your repayments to the level when you first got the loan, you can offset the effect of the new rules and have as much available for redraw as you put in.

Repayment amounts: If you make an additional payment in the future, the bank will offer you a lower repayment amount. If you choose this you can pay your loan back in smaller instalments, but over a longer period of time – you'll also pay more interest overall. Otherwise you maintain your repayment level, pay the loan off sooner and save on interest and fees.

Redraw: If you make a one-off extra payment in the future, and wish to be able to redraw on it later, you shouldn't decrease your repayment amount. If you do, your redraw balance will begin to erode.

Repayment amounts: Your minimum repayment obligation will continue to decrease. You can choose to lower your repayment amount, but your loan will take longer to pay back and you'll pay more interest overall.

Redraw: If you plan to redraw any extra payments you have made, you need to make sure that your regular repayments don't drop below the minimum amount you had to pay when you first got the loan. If you pay less than this, your redraw balance will eventually begin to erode.

Flexible banking, or grab for more interest?

"Our customers have told us they'd like greater flexibility and control in managing their home and personal loan repayments,"says Daniel Huggins, CBA executive general manager of home buying. "So we introduced this change to offer them that flexibility and support as they pay off their loan."

"This change aligns the Commonwealth Bank with industry practice and ensures our customers will not experience unexpectedly large increases to their loan repayments if they access a lump sum from their available redraw. This change also protects our customers by ensuring they can only redraw amounts that keep them within their contracted loan balance."

On the one hand, being able to get ahead on a loan and then wind back your repayments can help if you find yourself in temporary financial straits. However, if you choose to keep paying the bare minimum it will cost you in the long run. 

"It's crucial to understand how even small changes to the amount you repay can have serious knock-on effects when it comes to the overall cost of your mortgage," says Sarah Agar, head of campaigns and policy at CHOICE. "Cutting your monthly repayment by a couple of hundred dollars today can mean tens of thousands of dollars in extra interest paid over the course of the loan."

"If you're considering reducing your payments, ask the bank to tell you how much more it will cost you to pay off your loan."

What should I do with my redraw balance?

It depends on what you planned to use your additional payments for. Do you want to be able to redraw it later in case of a big unexpected expense? Do you want to have a bit more disposable income, instead of seeing a big chunk of your paycheck going to the bank? Or do you want to just pay your loan off faster? Unfortunately, you can't have your cake and eat it too.

If you want credit for a rainy day, you shouldn't reduce your payments when the bank gives you the option. CBA seems to be nudging people to open offset accounts instead of relying on redraw balances. Offset accounts are similar to everyday transaction accounts, except the more money you have in them, the less interest you pay against your mortgage.

If you want the extra disposable income, go ahead and drop those repayment rates. Just be aware that you won't be able to redraw some or all of those extra payments later on – they'll go toward paying off your loan. Because your loan will be paid off over the original term, you'll pay more interest compared to someone who pays their loan off quicker.

If you want to pay your loan off faster, put your repayments up and keep pouring money into that loan. Chances are you won't feel the effect of the new rules, but if you do need to make an emergency redraw, you can be generally sure the credit will be there.

You can adjust your direct debit amount by logging on to the NetBank tool, calling the bank (13 22 24 for home loans, 13 14 31 for personal loans) or by visiting a branch.

This is general advice only, and you should consider your own financial situation and do your own research.