Redraw Facility and Offset Loans
  • Updated on 15 May 2019
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Redraw Facility and Offset Loans

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Overview

The Offset Loan product is similar in its functionality to a Dynamic Term Loan product in Mambu. It automatically recalculates the interest due on the loan account in accordance with events that occur on the loan account.

As the name suggests, the Offset Loan product provides a facility to “offset” a non-principal balance against the outstanding principle of the loan for interest calculation purposes, thus reducing the interest calculated on an Offset Loan account. Such a functionality allows borrowers to have their excess cash temporarily reduce the interest burden on their loan without committing it to repaying the loan.

In Mambu this can be done via two similar, but different functionalities. Either an offset (deposit) account linked to the Offset Loan, or the Offset Loan’s redraw facility.

Please be Aware
Currently, these two options cannot be used simultaneously on the same product; it must be either one or the other.

Offset (deposit) account
When using the Offset (deposit) account functionality, a deposit account is linked to the loan account, similar to a settlement account. The balance on the offset (deposit) account is “offset” against the outstanding principle of the loan for interest calculation purposes. When calculating interest for an Offset Loan account, Mambu will deduct the balance on the offset (deposit) account from the outstanding principle of the loan account before multiplying by the interest rate - instead of multiplying the interest rate directly with the outstanding principal balance of the loan.

Redraw facility of an Offset Loan,
When using the redraw facility of an Offset Loan, borrowers can redraw (or reborrow) any principal that they had already repaid in excess of their scheduled instalments. For example, a borrower's expected monthly principal payment is $100. If they paid $200 each month for a period of 6 months, they will have paid an extra $600 in excess of their scheduled principal repayments. The redraw facility then allows the borrower to redraw $600 if needed. In the meantime the outstanding principal of the loan is reduced by $600, which reduces the interest calculated.

Please Note
In the many of its settings, the Offset Loan product is similar to a Dynamic Term Loan, with a few important exceptions:
  • It only allows for the Declining Balance (equal installments) interest method.
  • The interest type is always Capitalized.
  • It does not allow for Indexed Interest Rate Source.

Loans with Offset account linking functionality

Product Setup

When creating an Offset Loan product, there is a Redraw Settings section and a Offset Settings section the product setup form. Under the Offset Settings section you will see that the option to enable linking to a deposit account is automatically enabled for this product type. When you enable redraw in the Redraw Settings section, the Offset Settings section and its functionality will disappear.

Similar to a Dynamic Term Loan product, you can select the type of deposit product you want your Offset Loan account to be linked to and how automatic repayments are to be processed.

Mambu offsets 100% of the offset accounts balance against the loan principal.

An Offset Loan account cannot be disbursed unless a deposit account is linked to it; a "Missing linked deposit product" validation message will appear when trying to perform the disbursement.

Interest Calculation

For loans with offset accounts, Mambu accrues interest based on the following formula:

(Outstanding Principal Balance of the LoanOffset Account Balance) * Daily Interest Rate of the Loan %

For the calculation Mambu uses the:

  1. End of day transaction balance on the offset deposit account, and
  2. End of day outstanding principal balance

In case the balance on the offset account is equal to or higher than the loan’s outstanding principal balance, no interest would be charged on the loan.

Interest on the loan account will be recalculated when:

  1. Transactions that impact its balance are performed on the offset deposit account such as deposits, withdrawals, transfers, fees or application of interest. That includes backdated transactions.
  2. A repayment is made on the loan account including backdated repayments.
  3. A repayment is reversed on the loan account.
Please Note
At the moment, Mambu does not allow reversals on the offset deposit accounts (however, this feature is on our development roadmap).

Examples

The examples below assume the following account setup:

Loan Amount: $1,000
Interest Rate: 10% per year
Installments: 5 (monthly)
Disbursement date: 6 Jan 2017
Deposit made into linked account: $300 on 16 Jan 2017

Accrued Interest with zero balance offset account

Accrued interest with zero balance offset account

The accrued interest on the Account Overview will be updated to reflect the change in the balance of the offset deposit account. The image "Accrued interest with zero balance offset account", shows the interest accrued at the next instalments due date of 6 Feb 2017. Before the scheduled repayment is made on the loan account, the accrued interest is $8.33, since no deposit was made to the offset deposit account.

Accrued Interest with $300 balance in offset account:

Accrued Interest with $300 balance in offset account

When backdating a deposit of $300 to the offset deposit account to 16 Jan 2017, the interest accrued on 6 Feb 2017 is changed to $6.67 (see image "Accrued interest with $300 balance offset account"). For the period of 06 Jan 2017 to 15 Jan 2017, interest is calculated on $1,000, the outstanding principal of the loan. For the period of 16 Jan 2017 to 06 Feb 2017, interest is calculated on $700, the outstanding principal of the loan less the balance on the offset account.

Offset Loan account schedule at disbursement:

Offset Loan Account schedule at Disbursement

The loan account’s schedule will automatically update to reflect the change in interest caused by the change in balance on the offset account. The above image “Loan account schedule at disbursement” shows the initial schedule of the loan account with a zero balance on the offset account.

Offset Loan account schedule after deposit to offset deposit account

Below we see the Offset Loan account schedule, after the $300 deposit was performed on 16th Jan and the repayment was transferred from the deposit account to the loan account at due date, on 6th Feb:

Offset Loan Account schedule on 6th Feburary

As seen above, the schedule was recalculated and the Interest Expected was reduced overall, from a total of $25.24 to a total of $20.33, due to the deposit made on the linked deposit account.

Deposit account linking

This type of loan account cannot be disbursed unless a deposit account is linked to it; a "Missing linked deposit product" validation message will appear when trying to perform the disbursement.


Loans with Redraw Facility

Product Setup

A redraw facility is very similar to an offset account, but think of the offset account being part of the loan account.

When creating an Offset Loan product, there is a Redraw Settings section and an Offset Settings section in the product setup form. When you enable redraw in the Redraw Settings section, the Offset Settings section and its functionality will disappear. A redraw enabled loan product cannot be linked to a deposit account for settlement.

Loan Balances and Repayments

For loan accounts with redraw, Mambu maintains an outstanding principal balance and a redraw balance. When making a repayment, the user can select to make the repayment on:

  • The Redraw Balance, or
  • The Principal Balance.

When a repayment is made to the Redraw Balance it will be recorded as such on the loan account (see image “Redraw Balance”) and will be available for withdrawal in the future. If the repayment is made towards the Principal Balance, it is not available for withdrawal in the future and it will adjust the schedule in accordance with the “Reduce Number of Instalments” prepayment re-calculation setting.

Redraw balance

Whenever an instalment is due, Mambu will automatically take any redraw balance available to make the scheduled repayment. These automatic repayment transactions can be reversed like any other repayment transaction.

Accounting

From an accounting perspective, Mambu considers the redraw balance as part of the outstanding principal balance. Therefore repayments to the redraw balance will be booked against the relevant Loan Portfolio GL Account.
When a repayment is made on the redraw balance of a loan account, Mambu will create the following journal entries:

Type GL Account
Debit Transaction Source
Credit Loan Portfolio

When Mambu automatically collects a repayment from the redraw balance, it will create the following journal entries. This is because the redraw balance already sits in the Loan Portfolio GL account and interest is taken from the redraw balance.

Type GL Account
Debit Loan Portfolio
Credit Interest Income

Interest Calculation

For loans with offset accounts, Mambu accrues interest based on the following formula:

Daily Interest Rate of the Loan % * (Outstanding Principal Balance of the Loan - Redraw Balance of the Loan)

For the calculation Mambu uses the:

  1. End of day redraw balance of the loan, and
  2. End of day outstanding principal balance

In case the redraw balance is equal to the outstanding principal balance, no interest would be charged on the loan. The redraw balance cannot be higher than the outstanding principle balance.

Interest on the loan account will be recalculated when:

  1. Transactions that impact the redraw balance i.e. repayments to or withdrawals from the redraw balance.That includes backdated transactions.
  2. A repayment is made to the loan account’s outstanding principal balance including backdated repayments.
  3. A repayment is reversed on the loan account.

Loan Pay Off, Rescheduling, Restructuring, and Write Off

When closing (i.e. paying off, rescheduling, restructuring, or writing off) a loan account with redraw, Mambu will use the redraw balance to reduce the outstanding principal balance.

Consider an active loan account with $1000 principal balance outstanding and a redraw balance of $200. Whenever a loan closure is initiated, the resulting outstanding principal balance is $800.

Mambu will log "Redraw Transfer" and "Repayment Entered" transactions on the loan account for the redraw balance amount that was used to reduce the principal.

Examples

The examples below assume the following account setup:

Loan Amount: $1,000
Interest Rate: 10% per year
Installments: 5 (monthly)
Disbursement date: 12 Mar 2018
Deposit made into linked account: $300 on 22 Mar 2017

Accrued interest with zero redraw balance:

Given the use case, the accrued interest on the Account Overview will be updated to reflect the change in the redraw balance of the loan. The image "Accrued interest with zero redraw balance", shows the interest accrued at the next instalments due date of 12 Apr 2018. Before the scheduled repayment is made on the loan account, the accrued interest is $8.49, since no repayment was made to the redraw balance of the loan.

accrued interest with zero redraw balance

Accrued interest with $300 redraw balance

When backdating a deposit of $300 to the redraw balance of the loan to 22 Mar 2018, the interest accrued on 12 Apr 2018 is changed to $6.77 (see image "Accrued interest with $300 redraw balance"). For the period of 12 Mar 2018 to 21 Mar 2018, interest is calculated on $1,000, the outstanding principal of the loan. For the period of 22 Mar 2018 to 12 Apr 2018, interest is calculated on $700, the outstanding principal of the loan less the redraw balance.

Accrued interest with $300 redraw balance

Loan account schedule at disbursement

The loan account’s schedule will automatically update to reflect the change in interest caused by the change in the redraw balance. The image “Loan account schedule at disbursement” shows the initial schedule of the loan account with a zero redraw balance.
Loan account schedule at disbursement

Capitalized interest after scheduled repayment

See below the updated schedule after $300 were deposited into the offset account on 22 Mar 2018 and the scheduled repayment was made on 12 Apr 2018. The interest accrued as shown in image "Accrued interest with $300 redraw balance" has been capitalized (see image “Capitalized interest after scheduled repayment of $205.03”).

Capitalized interest after scheduled repayment of $205.03

Loan account schedule after repayment and with $300 redraw balance

The image “Loan account schedule after repayment and with $300 redraw balance” shows how the interest expected has been recalculated for every instalment taking into account the redraw balance of $300. The total Interest Expected has been reduced from $25.45 to $14.37 (made up of capitalized interest of $6.77 and expected interest of $7.60)

Loan account schedule after repayment and with $300 redraw balance

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