How a redraw facility works and why it’s a handy loan feature

There’s more to a home loan than the interest rate charged. Australian home buyers should also consider researching and taking advantage of home loan features, such as a redraw facility.

Let’s explore how a redraw facility works, and what makes it such a handy home loan feature for some mortgage holders.

 

How does a redraw work?

A redraw facility is a home loan feature that allows you to access some, or all, of the additional funds you deposit into your home loan. When you make extra repayments on your mortgage, this cash goes a long way to helping reduce your principal owing, and lowering your mortgage repayments. However, if you need cash for whatever reason, such as funding a wedding or a renovation, if you have a redraw facility, you may be able to access, or “re-draw” those funds.

Homeowners can either redraw these funds if, and when, they are needed, or they may choose to keep the funds in the home loan to pay off the principal faster. The funds you’ve deposited into your redraw facility may reduce over the life of your loan. Meaning that by the end of the loan term, your home loan balance and the available redraw should be zero.

A redraw facility is a common feature of many home loans. It’s typically not available, though, on construction loans and only some lenders allow it for fixed rate loans. In fact, for most home loan features, you’re more likely to gain access to these with a variable rate home loan, so check what is on offer before you apply for any mortgage.

 

How can you access your redraw facility?

If you want to know the balance of your redraw facility, or if you’re looking to access your funds, you can generally check your loan account online via your online banking platform, and view your available redraw amount at any time. Alternatively, you can call your home loan customer care team and ask them to check for you. Homeowners may be able to withdraw funds from certain ATMs, depending on your lending provider, but this may attract certain fees and come with restrictions on minimum amounts.

The amount available for redraw is the difference between what you have paid, and how much you were required to pay – typically minus one month’s scheduled repayment. This could be as little as a few hundred dollars, or tens of thousands of dollars, depending on your balance. For example, if your minimum monthly repayments were $2,500, and you had made around $10,000 in extra repayments over the years, you may have around $7,500 to potentially draw down on.

 

What are the benefits of a redraw facility?

Some of the benefits of a redraw facility may include:

 

Access cash when needed

Arguably the greatest benefit of a redraw facility is that it allows you to access funds if, and when, you need them. This allows you to avoid the risk of potentially taking out a personal loan or a credit card if you need funds urgently, or dipping into your savings account nest egg. The extra repayments you make on your mortgage can be reclaimed for whatever purpose you need, whether you’re paying for a family holiday or need to purchase a new car. These are funds you otherwise wouldn’t have, and when you’re not spending them, they’re working hard to help you reduce your mortgage repayments.

 

Chip away at your principal owing

Any extra repayments you make towards a mortgage can go a long way in chipping away at your principal owing. By reducing your loan balance, you may also be able to lower your monthly loan repayments. Even if you can only pay an extra $50 a week, extra repayments into a redraw facility can go a long way in reducing your repayment amounts. Consider putting any windfalls, such as a tax refund or a bonus, into your home loan as a lump sum payment, to further lower your total loan amount owing.

 

Reduce interest charges

A redraw facility works similarly to an offset account, in that any additional repayments you make may work to help reduce the amount of interest charged. Making extra repayments on a home loan could also help to shorten the life of the loan – if you never withdrew any funds. And, just like an offset account, these payments are accessible to you when you need the cash.

 

Take a break from repayments

If you have built up some extra repayments, you may be able to take a break from your scheduled mortgage payments, and instead use the additional cash for your monthly repayments. This can give homeowners some much needed breathing room if they need to take a repayment break for whatever reason, as they’ve protected themselves in the past by making extra repayments to cover the cost of their mortgage – for however long.

What are the risks of a redraw facility?

Before you consider comparing home loans that offer a redraw facility, it’s worth keeping in mind the potential disadvantages before you sign on the dotted line, including:

 

Redraw fees

Depending on your lender, additional payments may be made at no extra cost, with redraw funds taken out at any time. Just be sure to compare any potential fees or charges, as some lenders may charge you a redraw fee when you dip into your extra repayments.

 

May limit your home loan options

As mentioned above, not every interest rate option allows customers to gain access to a redraw facility. This feature is typically reserved for variable rate home loans, and you may not be able to gain access to one if you want a fixed rate. In this instance, it could be worth considering a split home loan rate, so that you can gain access to a “best of both worlds” scenario.

 

Can be less flexible than an offset account

While you may be able to access almost the entirety of your redraw balance, less one home loan repayment, some lenders do impose limits on the number of redraws you can make in a year. That means you may not actually get access to all the additional money you have put into your loan, if you withdraw a smaller amount to begin with, for example.

In some instances, you may need to apply to the lender to access the funds you need. This could make a redraw a less flexible option than an offset account – which is a separate transaction account containing your extra payments to be accessed when needed.

 

What happens after you use your redraw facility?

So, you’ve dipped into your redraw facility. What happens now? After you redraw money from your home loan, you continue to make your regular repayments as normal. However, be aware that by accessing your extra repayments, the loan balance, and your repayments, will increase again.

This means that any funds you withdraw will no longer be working to reduce your mortgage repayments, your interest charges, or the time taken to pay off your loan. Following the withdrawal of funds, you’ll likely see your next mortgage repayment increase, depending on the amount you accessed from the redraw. You are now paying interest on a higher loan principal amount, so your repayments will move in tandem.

What other home loan features are available?

When comparing home loan options, it’s worth being aware of the suite of features you may be able to access. Just keep in mind that there is more to a home loan than the features on offer, and it’s crucial that you compare the interest rate, and any fees charged, as well.

Offset account

This is a linked transaction account in which any funds you deposit into it work to reduce or ‘offset’ your interest. For example, a $500,000 home loan with $50,000 deposited into a linked offset would be charged interest as if the loan balance was $450,000. Utilising an offset account may allow you to lower your home loan interest charges and pay less interest, while letting you build up a nest egg of funds to withdraw if, and when, needed.

 

Extra repayments

Perhaps you don’t need the bells and whistles of a redraw or offset, and just want the option to make additional repayments? Not all lenders allow you to make extra repayments without penalty, so compare your options carefully. Any extra funds you put towards your loan should help to reduce your principal owing and lower your mortgage repayments.

 

Split rate home loan

As mentioned above, a split rate home loan can provide some borrowers a “best of both worlds” approach to their interest rate repayments. If you want the flexibility that a variable rate loan offers (such as access to a redraw facility), but the security of locking in your interest rate through a fixed rate home loan, you may want to consider a split rate loan.

 

Whatever your financial situation, it could be worth considering if a redraw facility would suit your home loan goals and budget. Reduce Home Loans offers customers access to a range of helpful features, including a redraw, through our extensive suite of competitive home loan products.

In fact, unlike some lenders, every single home loan customer at Reduce Home Loans has access to the ability to a redraw facility and the ability to make extra repayments. This is just one of the reasons we’re one of the most celebrated home loan lenders in Australia.

For more information on redraw facilities, or to discover the difference a Reduce Home Loan could make, please don’t hesitate to contact us today

 

Any statements are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.

1300 733 823