Commbank’s new home loan redraw rules could put your rainy day fund at risk
From 1 September the bank will adjust your redraw balance so it gradually falls to zero when your loan ends. You could lose money when you need it most.
Let's say you have a mortgage with the Commonwealth Bank and you've parked some extra money in the loan.
Those extra repayments mean you're paying off your loan faster and paying less interest over time. With a redraw facility you're also able to pull the extra money out when needed.
Extra mortgage repayments and a rainy day fund in one. Not bad.
But from 1 September Commbank will start trimming down your redraw balance so it reduces to zero by the end of your mortgage.
In other words, extra repayments are fine, but the bank wants to make sure you really do pay off the whole loan on time. So they're going to adjust the redraw balance (those extra repayments you made) in order to make sure your entire loan principal is paid off when it should be.
But what if you need that rainy day fund?
Slow down, this is confusing: What's going on?
Let's break it down with an example:
Samantha borrows $400,000 with a 30-year mortgage. Five years into the loan she makes $30,000 in extra repayments. As a result, the principal and interest repayments adjust and get smaller. Samantha adjusts her repayments down accordingly.
This is where the first problem comes in.
With the new rule, Commbank will adjust Samantha's loan repayments over time, so that by the end of the loan the repayments will hit zero. Assuming Samantha makes no more extra repayments, that $30,000 extra repayment will gradually reduce as it pays off the loan principal.
By year 10 of the mortgage, there might be only $20,000 to redraw.
In some ways this is good news. The bank is making sure Samantha is paying off her loan principal and is somewhat protected against rate rises.
But what if Samantha loses her job and needs the extra cash? What if she gets sick? The rainy day fund is vanishing into her home loan.
Worse, if Samantha made the extra repayment once, and then kept paying the adjusted minimum repayment, her extra repayment is no longer much of a buffer either.
What should I do if these changes affect me?
If you're in a similar situation there are a few things you can do. One is to top up your redraw with extra repayments over time and keep an eye on your redraw balance. Don't "set and forget" in the belief that the money will be there later.
Another option is to take out your redraw money and put it into an offset account. An offset account mimics the effects of extra repayments in that it reduces interest repayments (but you still make the same total monthly repayment).
The difference is the bank can't touch the money in the offset account in the same way because it is essentially a bank account. You have more control.
Of course, not every mortgage has an offset account. You can learn more about the difference between redraw facilities and offset accounts here.
Your other option is to refinance to another lender with a different redraw policy. But keep in mind that other lenders could easily follow Commbank's lead.