A redraw facility is an extra home loan feature that can be beneficial when it comes to reducing the amount of interest you pay and helping you own your home outright sooner.
A redraw facility is a home loan feature that gives borrowers the option of accessing funds from any extra repayments made on their loan.
This allows borrowers more flexibility with their home loan payment plans, giving them the ability to put any extra cash such as bonuses or tax back towards their loan to pay it off faster, whilst having the option of accessing these funds later on if needs be.
Redraw facilities work by giving you the flexibility to make additional repayments on your variable home loan, above and beyond your standard repayments. You are then allowed to ‘redraw’ (transfer back out of the home loan) this extra money should you need it.
By allowing you to make additional repayments to your home loan, a redraw facility helps reduce the loan balance quicker, thereby saving you money on interest.
As these have been additional repayments, above and beyond what was required as your standard repayment, should you need to access this money, you are able to transfer it back out (redraw from your home loan). Most lenders do not charge fees when doing this electronically and the funds are available instantly.
Keep in mind, you can only withdraw the extra repayments you have made. For example, if your outstanding loan amount is $350,000 and you make a lump sum payment of $50,000 into the loan, it will now show as owing -$300,000 with +$50,000 available. This means, at anytime you can withdraw that $50,000 available since it was an additional repayment.
A redraw can also be used to make regular additional repayments, it does not have to be a bulk repayment. For example, if your standard repayments are $500 per month, and you pay $700 per month, every month you accumulate an additional $200 per month in available redraw.
When shopping around for your next home loan, just tell your lender or Home Loan Specialist that you'd like a redraw feature as part of your mortgage.
Bear in mind that some home loan products, such as many fixed-rate loans, generally don't come with a redraw facility, so make sure to weigh up the pros and cons of whether a redraw feature is right for you before choosing a loan.
While this does depend on the lender, you generally cannot redraw on a fixed rate home loan. This is because most fixed rate home loan products typically do not come with an extra repayment feature or redraw facility.
If you wish to fix your loan, talk to your Home Loan Specialist about leaving a small portion of the loan variable, so you can utilise this feature.
So now that we know what a redraw facility is and how it works, let’s outline the pros and cons of using one.
Some of the benefits associated with a redraw facility include:
Flexibility to access the cash when needed: Any extra repayments added to a redraw facility can be accessed when needed, but may require taking a couple of steps to do so.
Reducing total amount of interest paid: Money added to a redraw facility helps lower the interest charged on the loan since there is a lower principal amount for the interest rate to be applied towards.
Own your home outright sooner: The math is simple, if you make extra repayments on your loan, you’ll pay off your home loan faster.
The main drawback of a redraw facility is that there are some restrictions:
A fee may be charged upon withdrawal: Some lenders may charge a fee when you request to withdraw funds, whereas other lenders may offer a set amount of free redraws per year before beginning to charge you.
Minimum amount for withdrawal: Whilst most lenders no longer have minimum redraw amounts, some lenders do still impose minimum redraw amounts. Always compare redraw features before choosing a loan or lender.
Slower access to money: Whilst most lenders do give you immediate access to redraw, some still do not. Again, chat to your Home Loan Specialist about your chosen lender’s redraw features.
Another way to save on interest is by using an offset account.
An offset account is a savings or everyday transaction account that is linked to your home loan. The amount of money in the account is used to offset the amount owed on your home loan. Funds in an offset account can allow you to reduce the interest paid on your loan while maintaining access to the cash for day-to-day expenses.
For example, if you have a $400,000 home loan and a balance of $20,000 in your offset account, your interest will be calculated on $380,000.
Keep in mind, there is generally an annual fee for offset accounts so it’s worth noting that if the balance in your offset account is low, the additional costs may outweigh the benefits you get from having it.
Depending on the lender you choose, an offset account and a redraw facility is not a guaranteed feature with every home loan, especially if you want a fixed rate loan.
If you want a redraw facility simply let your lender or Home Loan Specialist know and they can provide you with a shortlist of loan options suited to your specific needs. You can also select a redraw facility as a preference when comparing home loans here.