When you’re applying for your first home loan, it’s important to consider all of the options available when it comes to additional features. Home loan features like offset accounts and flexible repayments can help you pay off your mortgage faster and save money in the long run.
A redraw facility is one of the options you may come across. A redraw facility gives you access to any extra repayments that you make on your home loan on top of the minimum repayments and can be appealing for people who value increased flexibility. Understanding what redrawing on your home loan means, why you would do it and how it would benefit you is important for you to make an informed decision.
What Does Redraw on Home Loan or Redraw Facility Mean?
A redraw facility (also referred to as a home loan redraw or redrawing on a home loan) allows you to withdraw money from any extra repayments that you’ve made on your mortgage. Extra repayments refers to any additional repayments that you have made on top of the minimum required repayments. What this means is that you will be encouraged to make extra repayments on your home loan because you’ll be able to reduce the interest you pay without completely losing access to that money.
A redraw facility can be a good option for people who struggle with impulse control when it comes to their spending habits, because withdrawing on a home loan is a slower process than just taking money out of your savings account. However, it does provide the flexibility for you to pay for sudden expenses or save for planned events while enjoying a lower interest rate on your mortgage.
How Does A Redraw Facility Work?
If you make extra repayments on your home loan each month, your redraw availability will accumulate over time. There are three steps involved in determining your redraw availability, for example:
Step 1: Your minimum loan repayment is $1000 per month. You make an additional repayment of $300 per month to pay off the mortgage faster and decrease the amount of interest.
Step 2: The extra $300 per month goes into the redraw facility, which continues to grow as more money is added. After making these additional repayments for a year, you will have $3,600 in your redraw account.
Step 3: If you need to redraw this money at a later date, it will be available for you to do so. You may need to redraw the money for a sudden expense like a surgery, or a planned spend like a holiday. You could also leave it untouched.
Why Do I Need a Redraw Facility?
Having a redraw facility gives you easy access to extra funds when you need them. It can be more beneficial than simply keeping the money in a savings account, because you’re saving more money on home loan interest rates than you would be acquiring interest on the money in a savings account.
A redraw facility can provide you with peace of mind, knowing that you can pay off your home loan faster without leaving you without a safety net. You might want to redraw this money to buy a new car, fix an old home appliance or take a short course.
This feature can also help you save money, because it limits your access to your money and reduces the interest rates that you pay on your mortgage. This can be helpful if there is a future expense that you would like to set aside money for, such as an overseas trip.
How is the Redraw Balance Calculated?
Your redraw balance is calculated as the difference between your current home loan balance (all of the repayments that you've made, including additional repayments) and the scheduled home loan balance (the sum of all the required minimum repayments at that point).
Home Loan Redraw Pros and Cons
Pros of a redraw
1. Having a redraw facility can help you pay off your mortgage faster while still allowing you access to the money should you need it later on.
2. You can choose to grow your redraw account by making regular additional repayments on your home loan, or one off payments. For example, if you receive a bonus at work you can choose to contribute it all towards your home loan.
3. A home loan redraw can save you money in interest because you will pay lower interest rates on your mortgage.
Cons of a redraw
1. Many lenders will set limits on the maximum and minimum amount you can redraw, as well as the maximum amount of additional repayments that you can make per year.
2. It may take 1-2 business days for the money to appear in your account when you redraw on a home loan, whereas if you took the money out of a savings account or an offset account it would be instant.
3. Some lenders may also charge redraw fees or set a limit on the amount of free redraws you can make.
4. Redraw facilities may not be offered for fixed home loans.
What to Look For in a Redraw Facility
When choosing the best option for your home loan, it’s important to consider whether or not a redraw facility will benefit you. You should look for:
- No fees: If you choose to add a redraw facility to your home loan, you should check whether there are any redraw fees, limits on free redraws or flat fees attached to this feature.
- No limits on the number of redraws: You should also check whether there is a limited amount of free redraws available to you or a maximum number of redraws per year.
- No extra repayment caps: Some lenders will limit the amount that you are able to put towards your home loan as additional repayments.
- Reasonable minimum and maximum redraw amounts: Ideally, you’d want a redraw facility that has no minimum or maximum cap on the amount that you can withdraw but this is a common feature so it’s important to check what they are.
- Interest rates that are not higher than that of a ‘no frills’ home loan: Having a redraw facility may not be helpful if it has higher interest rates associated with it than that of a regular mortgage.
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Brittany has a mortgage that requires her to make repayments of $3000/month. The interest rate on her home loan is 3% p.a., while the interest rate on her savings account is 0.06% p.a. Brittany has decided to contribute an extra $300 to her mortgage each month in order to save on interest.
After twelve months of making consistent additional repayments, Brittany has $3600 in her redraw account. Brittany could decide to redraw this money or continue to grow the account.
Which Types of Home Loans Don’t Have Redraw?
Redraw facilities are usually not available for fixed rate home loans. Redraw may become available at the end of the fixed rate period, when the rate becomes variable.
How Much Can I Redraw?
Most home loans will allow you to redraw the sum total of all additional repayments you’ve made minus the amount of one month’s repayment.
However, some home loans will have maximum limits on how much you can withdraw, regardless of the amount in your redraw account.
How Often Can I Redraw?
You will usually be able to redraw whenever you like, provided that you’re not in default on the loan contract. However, redraw accounts are under the lender’s discretion, so they may set limits on how often you can redraw or how many times you can do so.
Does a Redraw Facility Cost Extra?
Some home lenders will charge flat fees in order to maintain a redraw facility, while others will charge redraw fees if you choose to activate it. Home lenders that do not charge extra fees for home loan redraws are the best options.
You will need to watch out for any home lenders that charge more expensive interest rates on home loan redraws, because this may cost you more over time.
How Does Redraw Reduce Interest?
By making additional repayments on your mortgage, you are reducing the amount of money that you have to pay interest on. A redraw account encourages you to make these extra repayments because you are able to maintain access to the money.
Does Redraw Reduce Repayments?
If you have money in your redraw account, you may be able to choose to make reduced monthly repayments for a period of time. If you do this, the money available in your redraw account will decrease each month. This could be a helpful feature if you have a lifestyle change to adjust to, such as a new job.
Is Redraw Better than an Offset Account?
A home loan offset account is a separate account that is linked to a home loan in order to reduce the interest rates, but otherwise functions as a regular transaction account.
Each of these home loan features have their own pros and cons and will benefit an individual person depending on their needs and habits. Offset accounts provide greater flexibility and access to your money, but a redraw facility may allow you to pay off your home loan faster if you make a minimal amount of withdrawals.
There are a range of different circumstances that apply when someone is looking for a home loan to suit them, so it is entirely dependent on that person’s particular financial situation.
What Does Available Redraw Mean?
Available redraw refers to the sum total of the additional repayments that you’ve made on your home loan. In most cases, this will be the amount that is available for you to redraw should you need to.