Why CBA mortgage-holders shouldn't panic over redraw changes
Commonwealth Bank customers being affected by the bank's changes to redraw shouldn't hit the panic button but they do need to be aware of what it means for them.
The new CBA redraw arrangements enable customers to reduce their ongoing repayments to reflect how far ahead they are on their loan repayments, freeing up some cashflow, while still ensuring they repay their loan in full by the agreed loan term.
The downside is, sooner or later, your ability to redraw will diminish as you continue to utilise your extra repayments to fund the lower loan repayments. This may remove the option to use redraw as a holding place for money you may use in the future for emergencies or a holiday.
The other thing to think about is that if you reduce your repayments it may cost more over the life of the loan.
For example, based on an average loan size of $400,000 over 30 years with an interest rate of 3.99%, if you made an additional repayment of $10,000 in year 10, a borrower who lowers their minimum repayments will pay an extra $7000 in interest and take close one year more to pay off their loan when compared to someone who sticks to the original repayment level.
If you can afford to stick to your original repayment level, the advantage is the loan will be repaid ahead of schedule and you'll save on interest.
An offset account is an alternative option which keeps your money separate from the loan but reduces your interest cost allowing you to pay your loan off sooner. Be aware though loans with offset accounts are generally more expensive than those without.
We all want to save money on our loan and additional repayments or using an offset account are still the best ways to go about it even with this change.