The Mortgage Agency
Using Home Loan Redraw and Cash Out Features
Before getting caught up in the excitement of taking out a home loan, it’s important to look at the different features offered and how to make the process work for you best.
If you’re in a position where you can make your mortgage payments a little higher than required, or you can make additional one-off payments here and there, you should consider a home loan redraw facility. This is a type of savings account attached to your home loan.
How Does a Home Loan Redraw Work?
There are two ways to take advantage of a redraw facility:
- Paying more than required for your mortgage each month
- Making extra repayments in lump sums
Here’s an example to illustrate how this feature of your home loan works:
Grant took out a home loan to fund his first family home. His monthly mortgage repayments are $1,000. Grant knew that he was in line to receive a promotion when he took out his home loan. Once he received it, he decided to pay an additional $100 per month on top of his mortgage.
In a year’s time, he had accumulated $1,200 from extra repayments nesting in his redraw facility that he could access at a later date.
While a redraw facility is comparable to a savings account, it has some differences that can be beneficial depending on your situation. When you make extra repayments into your redraw facility, that money doesn’t receive any interest. Instead, this money is offset against your home loan, which effectively reduces its amount of interest.
Most interest rates on home loans are higher than those on savings accounts, so you’ll save more money from your home loan’s interest than what you would have earned from interest on a savings account. Plus, you aren’t required to pay tax on the interest you save.
Want to pay less interest on your home loan? Contact The Mortgage Agency, and we can help you set up a redraw facility with your new loan.
What Can You Do With the Money in Your Redraw Facility?
There are no conditions or regulations about what you can and can’t do with any money you withdraw from your redraw facility. Many people use the money for home renovations, buying a car or paying for their children’s tertiary education.
Another option is to arrange to take a break from your mortgage repayments. You can use the money in your redraw facility to cover several upcoming payments so that you don’t have to pay anything on your home loan during that time.
You can also opt to leave your money in the redraw account and use it to settle your home loan early. This is a great way to save money on interest, too. If your redraw balance is quite substantial, you may want to discuss with your lender reducing your monthly repayments, meaning you won’t settle your loan faster, but you’ll pay less on your instalments every month.
How Do You Take Out a Redraw Facility?
Most types of home loans offer the feature of a redraw facility. The types of loans that don’t give you this option include:
- Business banking loans
- Construction loans
- Bridging loans
- SMSF loans.
Redraw facilities are only available with variable rate home loans. This means the interest rate isn’t fixed, so your loan interest rate fluctuates as the cash rate does. This can be risky, so be sure you can manage the volatility.
When you’re setting up your home loan redraw facility with your lender, here are some things to discuss with them first:
- Is there an activation fee to set up your redraw facility?
- Do you have to pay a flat fee for your redraw facility?
- Are you charged for each redraw? If so, how much?
- Is there a maximum number of redraws you can make per year?
- Is there a maximum or minimum amount of money you can redraw at a time?
The Mortgage Agency can assist and advise on every step of your home loan process. Contact us today to get started.
How To Retrieve the Money From Your Redraw Facility
You can request to cash out the money from your redraw facility via online banking, a phone call, or by visiting your lender. The payment may not be reflected immediately and could take a few days to process, so keep that in mind. However, some are instant.
How To Know If a Home Loan Redraw Facility Is Right For You
The first and most important thing to consider is whether you’re comfortable with a variable interest rate. If not, you can enquire with your lender or mortgage broker to see if you can get a redraw facility feature on your fixed-rate home loan.
Another consideration is whether an offset account could be a better option. Redraw facilities are more restrictive as to when, how often, and how much you can withdraw from your account. An offset account is essentially a transactional one that you can use every day and whenever you want.
We’re Here to Help
A redraw facility can certainly be beneficial if utilised correctly. It’s best to discuss your options with one of the brokers on our team, as we’ll provide a personalised approach suited to your financial situation and goals.
Our professional mortgage brokers have many years of experience helping clients with redraw facilities on their home loans. We can discuss the process with you and help you decide whether it’s something that will be of value to you.
To set up an appointment, contact our team of professionals today. whether an offset account could be a better option. Redraw facilities are more restrictive as to when, how often, and how much you can withdraw from your account. An offset account is essentially a transactional one that you can use every day and whenever you want.