Loan Tip: Redraw on a PI Loan

In my law firm I advise on debt recycling and come up with a common misunderstanding on a loan issue. This is the amount available to redraw when the loan is principal and interest.

Example
If the loan starts off at say $400,000 as a PI loan the balance of the loan will be decreasing each month. At the end of the 30 year term it should be $0 zero so that nothing is owing at this point.

When the borrower is ahead with their repayments, before of either using an offset account and/or paying extra there will be an amount available to redraw. But this redraw will only be able to be redrawn up to the limit of the loan and not the original loan starting amount. So after 1 year a person with a $400,000 loan which now has a balance of $390,000 may only be able to redraw up to $396,000 because the principal is decreasing.

The common misunderstanding is that they can redraw back to $400,000. but this would only be possible where the loan was IO

This is best illustrated with a simple diagram:

 

Had this very discussion with my broker yesterday...

 

Yes one must get ahead of the reducing balance curve.

No one uses the term crédit foncier any more, sadly. Maybe we can bring it back?

 

Terry, you say additional repayments or offset balance will add to the redraw. That makes perfect sense. However, I am with CBA and have fully offset a number of loans, so are paying zero interest (monthly interest shows as $0 debit). I have kept periodic repayments the same, but noticed that the redraw balance is not increasing. When I make additional repayments, the redraw balance immediately increments by the additional amount (all good there). However, zero interest debits (as accounts are fully offset) seem to have no immediate impact on the redraw balance.

Maybe this is a timing issue, and they do a recalculation periodically (say quarterly)?

 

Gotta love the MasterLimit

 

Harry, I can't explain that but CBA is a bit quirky

 

Your redraw does not increase becuase you are paying off your principle with the full periodic repayment. You should see your principle amount reduce at the same rate as your repayment amount since you are not paying any interest component.