- 25 Jan 2023
- 10 Minutes To Read
- Print
- DarkLight
- PDF
Redraw and Offset Settings
- Updated On 25 Jan 2023
- 10 Minutes To Read
- Print
- DarkLight
- PDF
The Offset and Redraw capabilities in Mambu's Dynamic Term loan products automatically adjust interest based on linked deposit account events. Offset allows non-principal balances to reduce interest on the loan temporarily. Redraw lets borrowers access excess repayments. Interest is recalculated based on balances. Both capabilities can be used together. Repayments affect outstanding principal balance. Mambu handles repayments and withdrawals accordingly. When both capabilities are enabled, interest is calculated based on both balances. The system automatically adjusts repayments from the redraw balance.
The Offset and Redraw capabilities are used for Dynamic Term loan products in Mambu. They automatically recalculate the interest due on the loan account in accordance with events that occur on the linked deposit account or the redraw balance.
The Offset and Redraw capabilities are available for Dynamic Term loans with a few important constraints:
- They are only available for loans with the Declining Balance (Equal Installments) interest calculation method.
- The interest type must be Simple Interest calculated using Principal and Interest.
Offset
As the name suggests, the Offset capability allows you to offset a non-principal balance against the outstanding principal of the loan for interest calculation purposes, thus reducing the interest calculated on an Dynamic Term loan account. With this capability enabled, clients can have their excess cash temporarily reduce the interest burden on their loan without committing it to repaying the loan.
You can link an offset account to a loan account even when the loan account is in Partially Disbursed state, after being refinanced.
With this capability, 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 principal of the loan for interest calculation purposes. When calculating interest for a Dynamic Term loan account with Enable Offset selected, Mambu will deduct the balance on the offset deposit account from the outstanding principal of the loan account before multiplying by the interest rate, instead of multiplying the interest rate directly by the outstanding principal balance of the loan.
If the interest rate on the offset deposit account is positive, then the deposit account will accrue interest, irrespective of the offset linkage.
Redraw
When using the Redraw capability of a Dynamic Term loan, borrowers can redraw or reborrow any principal that they had already repaid in excess of their scheduled installments.
For example, a borrower's expected monthly principal payment is USD100. If they paid USD200 each month for a period of six months, they will have paid an extra USD600 in excess of their scheduled principal repayments. The redraw capability then allows the borrower to redraw USD600 at any time, if needed. In the meantime, the outstanding principal of the loan is reduced by USD600, which reduces the interest calculated.
Product setup
- When setting up a new loan product, under Product Type, select Dynamic Term Loan.
- Go to the Interest Rate section of the form.
- Set the Interest Calculation Method to Declining Balance (Equal Installments).
- Under Calculate Interest Using, select Principal and Interest.
- Ensure that the Interest Type is set to Simple. This uncovers a new section called Redraw and Offset Settings.
- Select Enable Redraw, Enable Offset, or both.
Loans with offset account linking
When the Enable Offset checkbox is selected, the option to link to a deposit account is automatically enabled for this product type.
You can select the type of deposit product you want your loan account to be linked to and how automatic repayments are to be processed.
Mambu offsets 100% of the offset account's balance against the loan principal.
A dynamic loan account with the offset capability cannot be disbursed unless a deposit account is linked to it. A "Missing linked offset account" validation message will appear when trying to perform the disbursement without a linked deposit account.
Interest Calculation
For loans with the Offset capability, interest is accrued based on the following formula:
(Outstanding Principal Balance of the Loan + Interest Balance – Offset Account Balance) * Daily Interest Rate of the Loan %
where the following are used for the calculation:
End of day transaction balance on the offset deposit account
End of day outstanding principal balance
End of day interest balance
In case the balance on the offset account is equal to or higher than the loan’s outstanding principal balance, no interest is charged on the loan.
Accrued interest on the loan account will be recalculated when:
- Transactions that impact its balance are performed on the offset deposit account, for example, deposits, withdrawals, transfers, fees or interest application. This also includes backdated transactions.
- A repayment is made on the loan account including backdated repayments.
- A repayment is reversed on the loan account.
- Interest is applied multiple times during an installment.
At the moment, reversals on the offset deposit accounts are not supported.
Examples
The examples below assume the following account setup:
Loan Amount: USD1,000
Interest Rate: 10% per year
Installments: 5 (monthly)
Disbursement date: 18th of May 2020
Deposit made into linked account: USD200 on 18th of May 2020
Loan account schedule at disbursement
This is how the initial schedule of the loan account with zero balance on the offset account looks like:
The loan account’s interest accrued is automatically updated to reflect the change in interest caused by the change in balance on the offset account.
Accrued Interest with an offset account with USD200 balance
Our next example uses the following values:
Oustaging Principal Balance = USD1000
Interest Balance = USD0
Offset Account Balance = USD200
Daily Interest rate = 10%/360
No of days = 30
The image below shows the interest accrued as of 18th of June 2020 (for the first installment, starting with 18th of May 2020), which is calculated as follows:
(Outstanding Principal Balance of the Loan + Interest Balance – Offset Account Balance) \* Daily Interest Rate of the Loan %
The accrued interest on the account overview is updated to reflect the change in the balance of the offset deposit account.
Loan account schedule after deposit to offset deposit account
The interest calculated based on above formula is applied on the account and the schedule is updated accordingly. Please notice that only the first installment, where interest is applied, is affected by the offset balance, the other pending installments having interest expected calculated based on the expected principal.
Loans with redraw capability
A Redraw capability is very similar to an offset account—one can imagine it as an offset account being part of the loan account.
Loan balances and repayments
For loan accounts with the Redraw capability, Mambu maintains an outstanding Principal Balance and a Redraw Balance. When making a repayment, the client can choose 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 and it is available for withdrawal. If the repayment is made towards the principal balance, it is not available for withdrawal and it will adjust the schedule in accordance with the Reduce Number of Instalments pre-payment recalculation setting.
Whenever an installment is due, Mambu automatically takes any available redraw balance towards the scheduled repayment. Just like any other repayment transaction, these automatic repayment transactions can be reversed.
Interest Calculation
For loans with the Redraw capability, interest is calculated based on the following formula:
Daily Interest Rate of the Loan % * (Outstanding Principal Balance of the Loan + Interest Balance - Redraw Balance of the Loan)
where the following are used for the calculation:
End of day redraw balance of the loan
End of day outstanding principal balance
End of day interest balance
In case the redraw balance is equal to the outstanding principal balance, no interest is charged on the loan. The redraw balance cannot be higher than the outstanding principal balance.
Interest accrued on the loan account will be recalculated when:
- Transactions that impact the redraw balance (repayments to or withdrawals from the redraw balance) are made. This includes backdated transactions.
- A repayment is made to the loan account’s outstanding principal balance (including backdated repayments).
- A repayment is reversed on the loan account.
- Interest is applied multiple times during an installment.
Examples
The examples below assume the following account setup:
Loan Amount: USD1,000
Interest Rate: 10% per year
Installments: 5 (monthly)
Disbursement date: 18th of May 2020
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 below shows the interest accrued in the first due date, 18th of June, when no payment was made in the redraw balance.
And below the schedule is displayed with no redraw balance:
Accrued interest with redraw balance
Now, let's see what happens when a backdated payment transaction of USD205.03 (the total of the first installment due) is made in the redraw balance on the 1st of June. In this scenario, the interest accrued will be calculated on 2 intervals:
- The first interval, from 18th of May until 1st of June, using only the principal balance (the formula takes into consideration the redraw balance and interest balance as well, but for this interval both balances are 0)
- The second interval, from 1st of June until 18th of June, using (principal balance - redraw balance), since the redraw balance is > 0 (interest balance is still zero).
So, the accrued interest has a new value of USD7.37.
After the interest is applied, the schedule is also modified:
- The interest expected from the first installment will be updated with the new value (USD7.37).
- The the total due amount will be decreased as well, since the interest is smaller.
- The next installments will not be affected.
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 creates the following journal entries:
Type | GL Account |
---|---|
Debit | Transaction Source |
Credit | Loan Portfolio |
When Mambu automatically collects a repayment from the redraw balance, it creates the following journal entries:
Type | GL Account |
---|---|
Debit | Loan Portfolio |
Credit | Interest Receivable |
This is because the redraw balance already sits in the Loan Portfolio GL account and interest is taken from the redraw balance.
When the client wants to withdraw money from the redraw balance, the following journal entries are created:
Type | GL Account |
---|---|
Debit | Loan Portfolio |
Credit | Transaction Source |
Loan pay off, write off, rescheduling, and restructuring
When closing, meaning paying off, rescheduling, restructuring, or writing off a loan account with the Redraw capability, Mambu will use the redraw balance to reduce the outstanding principal balance.
Consider an active loan account with USD1000 principal balance outstanding and a redraw balance of USD200. Whenever a loan closure is initiated, the resulting outstanding principal balance is USD800.
Mambu will log Redraw Repayment transaction on the loan account for the redraw balance amount that was used to reduce the principal.
Redraw and Offset on the same account
The Redraw and Offset capabilities can be used simultaneously on the same account.
To use both capabilities on the same loan account, follow the steps described under Product setup and select both Enable Redraw and Enable Offset. Any loan account created under a product with both options enabled must be linked to a deposit account that allows offset, meaning that when creating a deposit product, in the Internal Controls section, you must select Allow accounts to be used for Offset. Settlement options will be by default No Automated Transfers.
Interest calculation
When using the Redraw and Offset capabilities on the same account, the interest will be calculated based on both the redraw and offset balances. The interest accrued is calculated based on the redraw and offset balances by default and updated at each cron job execution. However, on the schedule, the interest expected will be calculated based on the redraw and offset balances only when the interest is applied (on the due date).
For loans with the Redraw and the Offset capability, interest is calculated based on the following formula:
Daily Interest Rate of the Loan % * (Outstanding Principal Balance of the Loan + Interest Balance - Redraw Balance of the Loan - Offset Account Balance)
Loan balances and repayments
When both redraw and offset balances are enabled on the account, the installment will be automatically paid from the redraw balance, not from the offset balance, via Redraw Repayment transaction.