If you're considering refinancing your home loan, you may be wondering about the future of your redraw facility.
This guide explains how your redraw balance is handled during the refinancing process, helping guide your informed decision-making when managing your home loan.
A redraw facility is a home loan feature that enables you to make extra contributions to your home loan repayments. These extra funds accumulated in your redraw differ from your monthly loan repayments, allowing you to withdraw them when required.
For example, let's say that you have a redraw facility connected to your home loan, and the minimum monthly repayments are $1,500. If you decide to contribute an extra $100 on these monthly repayments for a year, you will consequently have $1,200 in your redraw facility.
Notably, you can only withdraw the extra payments made on your loan. The funds can be used to meet a range of expenses, be it renovations, paying off a debt, a holiday, a new car, or anything you wish.
Secondly, most lenders set limits on withdrawal and deposit amounts, the number of times your can contribute or take out, and/or the amount you can hold your account.
In other words, a redraw facility helps mortgage holders reduce the length of their loans. This can help you significantly save on the interest paid over your loan term.
Redraw facilities are generally available on most variable-rate loans, but some lenders may also offer a redraw facility on fixed-rate loans. The best way to check is to look at your loan contract, as it will state if you have a redraw facility.
Depending on your lender, you can access the funds through your lender's mobile app, ATM, phone, online or by visiting the branch.
You should also know that a redraw isn't strictly a bank account. Instead, it's a facility attached to your mortgage.
Therefore, you may or may not be able to get instant access to the funds on the same day you need them, as you would be able to with a savings account.
The purpose of refinancing is to get a better home loan deal. Therefore, understanding what happens to features like redraw assumes significance because they can impact your bottom line.
It is important to note that lending criteria vary from lender to lender. If you have a redraw facility with your home loan, some lenders may treat your cash as surplus once the refinance is over.
However, in some cases, it will be included in your settlement, and you won't get any of it back.
If you're unhappy with this, you can try negotiating with the lender.
According to industry sources, your redraw balance can be transferred to a refinanced loan. You'll be able to access the funds per your need as most lenders permit this facility to continue with them. This will ensure access to those extra repayments for home renovations or other expenses.
Nonetheless, the new lender's interest rates and terms may differ. So, you may have to pay slightly higher interest rates on the amount you've drawn.
Your bank may check your loan statements and account history when refinancing. However, if your loan repayments aren't made, or you have defaulted, the redraw facility may become unavailable for access.
Most mortgage contracts allow lenders to cancel features such as redraw facilities. However, the money in your redraw facility is your lender's, not yours. So, they could restrict your access to it, change the balance or alter the conditions based on the conditions stipulated in the contract.
Essentially, it all boils down to the terms of your contract with your old and new lender.
Therefore, reading the fine print on mortgage contracts is essential. In addition, as a precautionary measure, clauses such as "we can suspend or cancel your right to redraw and/or withdraw" should be clarified with your lender before signing the contract.
In Australia, banks have to inform you and receive consent to take your redraw.
At the same time, for example, if you fail to make your loan repayment or if you default on your loan, your bank may request you to repay your redraw. For this reason, your should read your contract in detail and speak to your lender about the redraw feature.
Typically, once your mortgage is paid off, your redraw and the loan balance will reduce to zero. As a result, your redraw facility gets closed, and the money is no longer accessible.
However, some lenders may let your redraw facility remain open for a certain period after paying the loan to enable you to access extra funds on your accounts, if any.
Lending terms and conditions for home loans vary, so you should scrutinise the details of your loan contract before signing the dotted line.
An offset account is a transaction account that is linked to your loan. You can withdraw or deposit cash as you would with a regular transaction account with an offset account.
The essential advantage is that holding extra cash in your offset account for a substantial time will enable you to reduce the interest charged on your home loan. Thus, an offset account can help you pay off your loan sooner.
Most lenders usually offer the offset feature on variable-rate loans only. Some lenders, however, provide offset accounts feature on select fixed-rate loan products.
The difference between a redraw and an offset is that your offset account is a bank account that belongs to you and not your lender. Therefore it is not impacted by lender-related issues.
If you refinance to a different loan with the same lender, it's a straightforward process, and you will mostly be able to retain your existing offset account.
However, if you switch to a new lender, you will probably have to open a new offset account. Nonetheless, depending on your contract with the original lender, you can maintain your original offset account as a general account.
Similar to redraw, the interest rate and fees vary when refinancing with the same or another lender.
While non-banks offer lower rates, their offset account feature appears to work quite differently from that of banks.
When the lenders are not authorised deposit-taking institutions (ADIs), it's not an offset in the conventional sense when they advertise an offset account.
Instead, it's a separately designated part of it where the account is, plainly speaking, a tally of any extra paid by the borrower.
Unlike in genuine offset accounts, the Federal government's guarantee on deposits up to $250,000 doesn't apply. On the other hand, your lender may freeze your access if you face any financial difficulty. Also, technically your loan will reduce by the amount you hold in offset. This will count out tax deductions forever should you turn your home into an investment property after a certain period.
Refinancing can be a great way to save on your mortgage repayments. However, having a redraw facility and an offset account on your current loan may mean losing these features when refinancing.
The Joust Marketplace can help you get a fair deal with attractive features on your home loan. Our Live Auction tool is designed to get lenders bidding against each other to offer mortgage holders their best rates. And with no obligation to proceed, you're free to explore your options without pressure.
The information in this article is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.