Recalculation of Minimum Repayment Questions

• 

  zonra on 25/06/2020 - 11:51

  +2

  ask for recalculation of minimum repayments (reduced)

  This is essentially refinancing and if you do go ahead with it the redrawable portion (100k) will no longer be redrawable.

  • 

    spedohero on 25/06/2020 - 11:55

    But when i checked with the bank they told me the redrawable portion will be used to pay down the loan balance but still available for redraw.

    And if i redraw any amount out of the 100k, the system will recalculate the minimum repayments.

    Sorry, not doubting you, but that is my main concern as well. :)

    • 

      zonra on 25/06/2020 - 11:58

      I would definitely take your bank’s words over mine tbh.
      It is not the case for my bank though, but then all Ts and Cs are different between products.

      I am assuming by paying above the new minimum repayments over the reduced loan balance (due to positive redraw amounts) will help to reduce the interest i am paying over the term.

      The way I understand it is paying $1500 a month when your minimum repayment is $1500 offers the same interest benefit as paying $1500 a month when your min repayment is $1000. Hope that makes sense.
      P/s: Not a qualified financial advisor, best to do your own research as well.

      • 

        spedohero on 25/06/2020 - 12:07

        That is correct.

        But my main purpose to have the minimum repayment recalculated is to have the bank pay down the effective loan balance due to positive redraws, therefore reducing the interest by effective loan balance x interest rate.

        I am assuming that would help to reduce the interests i am paying over the term.

        But i am not sure if i am thinking right, so i thought if anyone has the same experience to advise that would be great :)

        Thank you.

        • 

          zonra on 25/06/2020 - 12:28

          @spedohero: In a nutshell:
          If you have a 150k mortgage, min repayment of $1500 a month over however long the life of the loan is.
          Interest is calculated on the loan balance (say, 150k on the first month), for example $1100 of the $1500 is taken by the bank as interest, $400 is taken off principal.

          But if you make an extra 100k deposit on the first day of the first month.
          Interest is now calculated on effective loan balance (150k-100k = 50k), the amount of repayment is still $1500 a month (this number is unlikely to change unless interest changes for variable loans or if you refinance).
          Interest is now only, say $550, leaving $950 taken off your loan principal.

          Hope that clears things up.

          P/s: Another thing is after you've made the extra 100k repayment, you can actually cease making repayments each month (at least with my bank this is the case), you'll find that the bank simply take $1500 off redrawable amount (100k) each month until it's used up. Then you need to start making repayments again.

        • 

          RedSky1 on 25/06/2020 - 12:31

          @spedohero: Having the redraw balance in there should reduce the level of interest you pay basically the same as if you had your loan varied where the bank takes your redraw amount and permanently takes it off the balance of your loan. My advice, Leave it alone mate! Redraw is best of both worlds if you can keep plenty in there. Good to have access to it if you need it.

      • 

        Diji1 on 25/06/2020 - 13:27

        take your bank’s words

        Seriously?

• 

  hyouden on 25/06/2020 - 12:51

  +1

  Is this an interest only loan or principal+interest?

  IMO, if you refinance, you are in a worse off position (provided you can pay off your debts as is).

  Lets say you have $100k remaining on your loan at an interest of 2.5%.

  Scenario 1: Pay off loan faster within 10 years by making your monthly repayments ~$943. You incur roughly interest of $13k.

  Scenario 2: Refinance for new monthly repayment ~$395. You roughly incur interest of $42k.

  These are very basic scenario's and you could argue that putting cash in bank to accumulate interest is going to offset loan interest etc.. In the above scenario, you would still be better off in scenario 1 vs 2 by roughly $8k.

  There are a number of variables here you need to work out. IMO, the decision to refinance is really to open yourself up to additional funds and most do not refinance to reduce min repayments unless you are in financial strife (e.g. new baby).

  Disclaimer: This is not meant to serve as financial advice. Just a homeowner myself and these were some considerations I had to make.

  • 

    spedohero on 25/06/2020 - 13:13

    Hello,

    This is a PI loan. Only redraw facility.

    In scenario 2, if i continue to pay $943 instead of $395, does it put me in a better situation than scenario 1?

    When the word refinance is used, does it mean that my redraw amount will drop to zero or it varies to different banks?

    I was told by my bank redraw amount will pay down the outstanding loan but the redraw is still available for redrawing.

    My plan is to make additional lump sum payment of $100k to effectively reduce the outstanding loan amount x interest rate, but i will continue to make the higher minimum repayments calculated prior to lump sum repayment. The $100k is available for redraw anything i need to, which the minimum repayment will re-calculate again by the bank.

    I think i need to call my bank again :)

    • 

      kurovon on 29/06/2020 - 18:04

      I could be wrong but the way I see it is that you refinance the loan onto lower repayments and the $100k is paid into the principal and you won't have it anymore. Lower repayments are calculated on a new lower interest rate, lower principal and by default an extension of your home loan again (back to 30 yrs unless you negotiate otherwise).

      Your Terms of Contract will stipulate the minimum payments you make each month for the life of that loan, regardless how ahead you are in your payments - the bank will just charge you an early termination fee if you 'pay it off' and 'close' the loan. If you have advanced payments exceeding the loan amount, your bank just keeps taking out the minimum amount from the advanced payments for the duration of the contract without you paying anymore into it.

      However, because you have effectively added $100k onto the principal it will add it as equity against the property which you can redraw again - there are quite important tax implications taking money out as redraw vs. just having it in your offset - you'll need to speak to a finance professional about it.
      I imagine in this scenario your minimum payments will have to increase because you have changed your terms of contract by doing the redraw - normally sets off alarms with LMI.

      Not professional advice, just what I think I know.

• 

  hyouden on 25/06/2020 - 13:36

  In scenario 2, you will pay the same amount of interest as scenario 1 really… so long as you are making the same or greater amount of repayment (ie. >$943) you will not really see an impact of the refinance.

  In my case, I paid a lot more than my min repayment and have 0 loan balance. In this case, the bank automatically stops the min repayment without me closing the loan. Don't know how your bank does this so you have to check with them.

  Refinance is quite simply, changing the terms of your loan. So if your intention is to reduce your min repayments and keep the same amount as offset, it would still be termed refinance.

  "My plan is to make additional lump sum payment of $100k to effectively reduce the outstanding loan amount x interest rate, but i will continue to make the higher minimum repayments calculated prior to lump sum repayment. The $100k is available for redraw anything i need to, which the minimum repayment will re-calculate again by the bank."

  Based on this scenario, it really does not matter if you refinance or not. You're basically changing the min repayment value not the interest payable (provided you continue to pay more than your previous min repayment).

• 

  footyboy on 28/06/2020 - 17:36

  Hey spedohero,
  If you can afford it, keep the redraw facility for future renos/purchases/investments or for a rainy day. If you reduce it and need it back, you'll have do for a formal application, full assessment etc.
  Thanks,
  Aidan - mortgage broker.