Redraw - extra investment not reducing repayments?

How does a P&I loan with redraw work if the extra funds deposited into the redraw has no impact on the repayment amount?

Wouldnt the extra amounts reduce the interest charged at least and trim down the repayments?

Seems bizarre.
Thanks!

 

Pi payments are a set monthly amount. If you redraw or put extra in the payments remain the same unless you request the lender to recalculate.

 

Having extra funds in the loan or in the offset account reduce the remaining p&i term, not the minimum repayment amount.

 

The repayments go on as per norm - however the actual interest amount debited each month from the loan account will be below expected, resulting in the principal paid down amount paying down at an accelerated rate.

 

So using the redraw essentially increases the % of the set repayment being principle instead of interest? and say depositing $190k in the redraw of a $200k loan would reduce the interest component to very little ?

 

Correct.

It reduces the interest you pay however not the gross amount you are paying.

 

You would only have redraw available if you had paid extra into the loan. Doing this doesn't change the repayment amount unless you request the bank to reduce it to the minimum (generally).

So if you had a $200,000 loan at 5% the repayments for a 30 year PI loan would be $1074 per month.

If you deposited $190,000 into the loan the repayments would still be $1074 per month, but you would have a lot more going towards the principal of the loan and very little interest - interest would be less than $400 per year.

 

Redraw is excess funds you can draw down on. I don't think you can "deposit" money into redraw, it's just a payment off the principle. So if you went into your bank with $1k cash and deposited it into your loan account then it would reduce the principle by $1k.

 

Hi @Terry_w, love your work.
Just guessing there maybe a typo in here somewhere?

 

Thanks everyone for the replies. Its kinda a dumb question but better to ask than assume and pay for it down the track.