Redraw

For dynamic term or interest-only loan accounts configured with the Redraw capability, Mambu maintains two key balances: the Outstanding Principal Balance and the Redraw Balance. The Redraw Balance acts as a holding account for overpayments, allowing these funds to potentially reduce the interest accrued on the loan. To learn more about redraw settings, refer to Redraw and Offset Settings

Crucially, interest on your loan will be calculated not on the principal balance, but on the Principal Balance minus the Redraw Balance. This means that any funds held in your Redraw Balance effectively reduce the amount of principal on which interest is charged, leading to a financial benefit.

Repayment options - redraw and principal balance

When making a repayment, borrowers have the option to direct the funds towards either:

• Principal Balance: Repayments made to the Principal Balance are not available for withdrawal. These payments directly reduce the outstanding principal and trigger an adjustment to the loan schedule, in accordance with the pre-payment recalculation method configured for the account (e.g., Reduce Amount per Installment or Reduce Number of Installments).
• Redraw Balance: Repayments made to the Redraw Balance are recorded as 'Payment Made' transactions. Funds in the redraw balance are able to be withdrawn if the lender chooses to provide this option. They do not directly adjust the loan schedule but provide an interest benefit.

Redraw transaction types

• Redraw Balance: When you make an extra payment and direct it to your Redraw Balance, Mambu logs this as a 'Payment Made' transaction. These funds are then available for you to withdraw if needed.
• Redraw Repayment (automatic): On the installment due date, Mambu automatically utilizes funds from your Redraw Balance to cover the installment due. This is recorded as a 'Redraw Repayment' transaction.
• Redraw Withdrawal: This allows borrowers to reborrow any funds they have already repaid in excess of their scheduled installments. For instance, if your monthly principal payment is £100 and you paid £200 for six months, you'd have an extra £600 in your Redraw Balance that you could withdraw.

Key aspects of redraw

• Interest Calculation: The interest accrued on your loan account is continually recalculated.
  • If Interest from Arrears is Decoupled, interest will always be recalculated after Payment Made or Redraw Withdrawal transactions based on the Expected Principal Balance - Redraw Balance.
  • If Interest from Arrears is not decoupled from the repayment schedule, interest will be calculated based on the Outstanding Principal Balance + Interest Balance - Redraw Balance.
  • If your Redraw Balance equals your Outstanding Principal Balance, no interest will be charged on the loan.
  • The Redraw Balance cannot exceed the Outstanding Principal Balance.
• Immediate interest impact: A significant improvement with this feature is that the Interest Expected (the interest component of your upcoming installment) is now updated immediately after Payment Made (to Redraw Balance) and Redraw Withdrawal transactions. You no longer have to wait for the interest application event for this update to reflect. If the redraw balance impacts more than one installment, you'll see the interest recalculated across all of them.
• PMT Recomputation: The Payment Amount (PMT) for future installments will not be recomputed after Payment Made or Redraw Withdrawal transactions. This is because the system anticipates that scheduled payments will be executed on time on their respective installment due dates from the Redraw Balance.
• Recalculation triggers: Interest accrued/expected on the loan account will be recalculated whenever:
  • Transactions that impact the Redraw Balance (repayments to or withdrawals from the redraw balance) are made, including 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 (only when Interest from Arrears is not decoupled).

Examples of interest accrual with redraw

In the following examples we will assume:

• Loan Amount: £1,000
• Interest Rate: 10% per year
• Installments: 5 (monthly)
• Disbursement date: 18th of May 2020

Scenario 1: Accrued interest with zero redraw balance

If no payment is made into the redraw balance, the interest for the first due date (18th of June) would be calculated solely on the principal balance.

1000*10%/365* 31 days = 8.49

Scenario 2: Accrued interest with a non-zero redraw balance

Consider a backdated payment transaction of £205.03 (equal to the first installment amount due) made into the redraw balance on June 1st. In this case, the interest accrued will be calculated over two intervals:

• First Interval (May 18th - June 1st): Interest is calculated on the full principal balance (as both redraw and interest balances are zero for this period).
  • 1000*10%/365* 14 days = 3.84
• Second Interval (June 1st - June 18th): Interest is calculated on Principal Balance - Redraw Balance, as the redraw balance is now greater than zero.
  • (1000-205.03)*10%/365* 17 days = 3.70

As a result, the accrued interest will be reduced (e.g., to £7.54 in this example). After the payment made transaction, the expected interest for the first installment will update to this new lower value, but the Total due amount (PMT) will stay the same. Subsequent installments, if no further redraw activity occurs, will reflect the original schedule unless adjusted by other principal or redraw repayments.

Accounting implications of redraw

From an accounting perspective, Mambu treats the Redraw Balance as part of the outstanding principal.

• Repayment to Redraw Balance: When a repayment is made to the redraw balance, Mambu generates the following journal entries:
  • Debit: Transaction Source (e.g., Bank Account)
  • Credit: Loan Portfolio GL Account
• Automatic Redraw Repayment: When Mambu automatically collects an installment from the redraw balance, the journal entries are:
  • Debit: Loan Portfolio
  • Credit: Interest Receivable (as interest is effectively paid from the principal held in the redraw balance)
• Redraw Withdrawal: When a client withdraws money from the redraw balance, the journal entries are:
  • Debit: Loan Portfolio
  • Credit: Transaction Source (e.g., Bank Account)

Loan closure, write-off, rescheduling, and restructuring

When closing (paying off), rescheduling, restructuring, or writing off a loan account with the Redraw capability, Mambu automatically uses the existing Redraw Balance to reduce the outstanding principal balance.

For example, if a loan has an outstanding principal balance of £1000 and a redraw balance of £200, initiating any form of loan closure will result in an effective outstanding principal balance of £800. Mambu will log a Redraw Repayment transaction for the amount of the redraw balance that was used to reduce the principal.