What is loan amortisation?
Everything you need to know about loan amortisation and how it works.
Loan amortisation is the process of repaying a loan through regular payments over a set period of time. Each payment includes both the principal amount borrowed and the interest charges. In the beginning, the interest portion is higher, and as the loan matures, the proportion of the principal in each payment increases, which reduces the balance of the loan until it’s paid off completely.
How does the ability to redraw decrease from loan amortisation?
When you make extra repayments on an amortised loan with a redraw facility, you’re reducing the principal balance faster than the original amortisation schedule. This can lead to less interest being paid over the life of the loan since interest is calculated on the remaining principal balance, which has now been reduced.
Some lenders set a limit on the amount of extra payments that can be redrawn. This limit is usually tied to the original loan amount or a predefined threshold. As you make regular payments and reduce the outstanding balance, the difference between the original loan amount and the remaining balance narrows. This means you have less room to redraw because you're approaching the point where the loan will be fully paid off. Learn more about how our redraw facility works.
If you redraw the additional funds you’ve put in, the principal increases again, and future payments will have a higher interest portion, just like at the start of the original amortisation schedule.
In essence, loan amortisation reduces the gap between the original loan amount and the remaining balance, which, in turn, limits the amount available for redraw. Some lenders do this to manage their risk and ensure that borrowers don't have unlimited access to additional credit as the loan is paid down. The specific terms and conditions related to redraw facilities can vary, so it's important to review your loan agreement to understand how redraw works for your loan.
This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.
