Redraw Facility and Offset Loans
- Updated on 04 Jan 2019
- 7 minutes to read
An Offset Loan product is a dynamic type of loan, which allows enabling redraw facility on it (via Redraw Settings in the product configuration).
A loan linked to an Offset (deposit) account allows for the interest charged on the loan account to be “offset” against a deposit account balance. In other words, if a borrower has a balance in a linked deposit account, that balance will be deducted from the outstanding loan principal balance when calculating the interest due on the loan account - thus offering the customer the benefit of a reduced (or “offset") interest.
A loan with a redraw facility allows a borrower to borrow money they’ve already repaid. For example, the borrower's expected monthly installment amount is $100. If they pay more each month, such as $200 for a period of 6 months they’ll have paid an extra $600 on top of what they had to pay. A redraw facility then allows the borrower to withdraw that extra $600 if needed, but at the same time it also reduces the expected interest due, since they are considered as prepayments.
Loan with Offset account linking functionality
On 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 and the option cannot be disabled for the time being. You can select here the type of deposit product you want your offset loan account to be linked to, or allow for any deposit product to be selected at loan account creation.
Currently, Mambu allows offsetting at 100% only, and this information can be viewed under "Offset Settings" when defining the product or on the product overview.
Offset Loan product is a dynamic type of loan and is available only with the "Declining Balance (equal installments)" interest method.
Interest calculation based on Loan and Deposit account balances
The interest accrued is calculated as:
- Daily Loan Interest Rate % * (Outstanding Loan Principal Balance - Deposit Account Balance)*
The interest calculation uses the End of Day Balance for both the loan and deposit accounts:
- For deposits EOD balance is end of day transaction balance
- For loans EOD balance is outstanding principal balance
If the balance on the offset deposit account is equal to or exceeds the outstanding principal loan balance, then no interest is charged on the loan account.
Loan Interest recalculation upon Deposit account actions:
- When transactions are performed on the linked Deposit account then the Loan Interest Accrued will be recalculated.
- Transactions that impact interest recalculations: backdating deposits, withdrawals (including transfers), fees and any interest applied transactions.
- Reversals: we do not allow reversals from the deposit account at this point (to be added later)
Loan Interest recalculation upon Loan Account actions:
- When a repayment is backdated on the loan account, the accrued interest will be recalculated accordingly.
- When reversing repayments from Loan Account, the accrued interest will be recalculated.
Given 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
The interest accrued, on the Details section under the Account Overview will reflect the interest calculation detailed above whenever a deposit or withdrawal is performed on the linked deposit account, ie.: Daily Loan Interest Rate % * (Outstanding Loan Principal Balance - Deposit Account Balance).
In below example, image "Accrued Interest without Deposit", at due date, 6 Feb 2017, before the repayment is applied to the account the accrued interest is $8.33, considering that no amount was deposited in the linked deposit account. However, if a deposit was performed in the linked deposit account on 16 Jan 2017, the interest accrued on 6 Feb 2017 will be $6.67, image "Accrued Interest with Deposit", where the interest for period 6th Jan - 15th Jan is calculated based on the Outstanding Principal Balance only ($1,000), and the interest for period 16th Jan - 6 Feb is calculated on "Outstanding Principal Balance - Linked Deposit Account Balance" ($1,000 - $300).
Accrued Interest without Deposit account linked:
Accrued Interest with Deposit account linked:
The schedule will reflect the new interest once the transfer is performed from the linked deposit account or when a repayment is performed in the loan account directly, see below screenshots for an example.
Offset Loan account schedule at disbursement:
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:
As we can see in above example, 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.
Loan with Redraw Facility functionality
Offset Loan product is a dynamic type of loan and is available only with Declining Balance (equal installments) nterest method, and the interest is capitalized when applied. Therefore, it is very similar in that sense to a Dynamic Term Loan in Mambu.
Calculation of interest accrued for loans with Redraw Facility enabled
- Daily Loan Interest Rate % * (Outstanding Loan Principal Balance - Redraw Balance)
When performing a payment on a loan account the user can select from two options, making a repayment:
- On Redraw Balance
- On Principal Balance
In terms of accounting, the repayment is on Principal balance, the repayment option allows for the repayment to be recorded under "Redraw Balance" and will allow in the future to be withdrawn. A repayment with option "On Principal Balance" means the repayment is allocated to Principal but can not be withdrawn anymore, and it adjusts the schedule, according to "Reduce Number of Installments" prepayment recalculation method.
If the repayment is made "On Redraw Balance" then, in the future it will allow withdrawing from the amount and the repayment is recorded as "Payment Made" under transactions tab. At due date, if there is an amount available under "Redraw Balance", Mambu will automatically make a repayment towards the due installment. If the available "Redraw Balance" is higher than what is due, Mambu will only transfer the due amount, the difference remaining available as "Redraw Balance". "Payment Made" transactions can also be reversed, just as a "Repayment" transaction.
At loan Pay Off action, Mambu will deduct the redraw balance from the Payoff Amount, since the amount left under Redraw Balance was already paid towards the loan.
Accounting Bookings for payments made "On Redraw Balance"
When entering a Payment Made transaction, below journal entries will be logged for the total paid amount:
When interest is applied, we also Capitalize it on Redraw accounts, therefore Mambu perform below bookings, for the interest amount:
Rescheduling or Writing Off a Loan with "Redraw Balance"
When rescheduling or writing off a loan account with Redraw Facility enabled and Redraw Balance available, the Redraw Balance amount is reduced from the principal balance.
For example, given an active loan account with $1000 Principal Balance remaining and $200 Redraw Balance prepaid before, when the user initiates loan rescheduling, then the "Current Outstanding Principal" is reduced by the amount of redraw Balance, thus resulting in a principal balance of $800.
Similarly, when writing off a loan with Redraw Balance on the account, when the user initiates the write off, the "Write Off Amount" is reduced by the amount of the Redraw Balance, and on the write off dialog a new field will capture the Redraw Balance.
In both cases, Mambu will log "Redraw Transfer" and "Repayment Entered" transactions for the redraw balance amount that was reduced from principal.