A redraw facility is a widely overlooked aspect of home loans.
Many homebuyers don’t know what it is or are unaware that their home loan offers this feature.
If you’re taking out a home loan on a variable interest rate and you want to make extra repayments to your home loan balance, setting up a home loan redraw facility means you can access those additional funds should you need them at some point in the future.
Redraw facilities offer some advantages over other home loan features but also come with some drawbacks.
So, if you’re shopping around for home loans and are interested in finding out more about redraw facilities, here are seven things you need to know.
1) How Does a Home Loan Redraw Facility Work?
According to your mortgage agreement, you have a minimum loan repayment that you’re required to pay regularly – be it weekly, fortnightly or monthly.
Money that you deposit over and above that goes towards paying off your principal loan amount quicker – but it ends up accumulating in your redraw facility so that you can access it if you never need extra cash flow.
There are two ways that you can contribute payments over and above your minimum home loan repayments:
- add money to your mortgage repayments, or
- deposit a lump sum.
Later, you can apply to redraw that additional money. What you choose to do with that money is completely up to you.
2) How Much Money Can I Withdraw?
Generally, you can check your available redraw balance through your internet banking profile.
The additional amount you’ve deposited to your mortgage repayments is your redraw balance.
But, it’s worth noting that not all of that money will be available to withdraw.
There needs to be the value of at least one instalment of your mortgage remaining in your redraw facility at all times. So, if you have deposited a lump sum of $10,000 but your mortgage is $2,000, your available redraw balance is $8,000.
Most lenders will have a minimum redraw amount, as well as a maximum one. You’ll have to enquire with the lender or your mortgage broker about the exact terms relating to your home loan redraw facility.
3) How Can I Access My Redraw Facility?
To access the funds in your redraw facility, you should ensure that you honour all your home loan repayments and that you have a good credit history. Either of those factors could cause the bank to disallow you access to your redraw facility.
Beyond that, there are various ways that you can access the available balance of your home loan redraw facility for your convenience.
- Go to Your Lender
You can fill in and submit an ‘Application to Redraw Payments In Advance’ hard copy in person at your lender.
Take note that withdrawals made directly from the branch rather than online may result in extra charges.
- Via Your Lender’s Website
You can fill in and submit an online ‘Application to Redraw Payments In Advance’ from your lender’s website.
- Via Internet Banking or Your Mobile Banking App
You can select the option to redraw via your personal login. Although this is probably the quickest and easiest option.
You need to transfer the money from your redraw facility into your transaction account. If the money you want to transfer exceeds your online transfer limit, you will first have to adjust that limit.
4) How Many Times Can I Withdraw?
Some lenders have a few free redraws, while others charge you a fee every time you tap in. So you can withdraw from your redraw facility as many times as you can afford to.
However, it’s completely dependent on the terms and conditions of your lender’s redraw facility. For example, some lenders might have a maximum number of redraws that you can do per year.
Be sure to check all of these conditions with your lender or mortgage broker in advance.
5) Can I Use My Redraw Facility To Pay Off My Home Loan Faster?
While you definitely can withdraw the available balance of your redraw facility if you want to, an alternative strategy could be to leave that money there as a supplement to your home loan principal.
If you decide to keep extra funds in your redraw facility, these additional repayments will reduce the amount of interest you repay over the term of the home loan and shorten the time it takes to pay off the loan.
Suppose you have a $400,000 loan, which needs to be paid off over 25 years with an interest rate of 6.5%. In that case, the minimum monthly repayment for the principal and interest would be around $2,700.
If the interest rate remained fixed for the duration of the loan, the total amount of interest repaid would be around $413,000.
However, if you paid an extra $300 and make monthly repayments of $3,000 per month, you can reduce your loan term from 25 years to 20 years which means you’ll end up paying significantly less interest.
Your interest would only be around $315,000 – meaning you’re saving more than $100,000!
6) Why Should I Use My Redraw Facility To Save Money Rather Than Other Savings Accounts?
In addition to everything mentioned above, there are a few more benefits to be aware of.
When you put money into your redraw facility from extra repayments, it doesn’t receive any interest like a standard savings account would.
However, the money in your redraw facility reduces the amount of interest that you have to pay on your home loan. As a result, interest rates on home loans are generally higher than savings accounts.
By doing it this way, the money saved from your home loan’s interest will effectively be more than the money you would have gained in interest from a savings account.
What’s more, you are not liable to pay tax on this interest saved, whereas you would be putting those funds into a savings account.
7) Disadvantages of Home Loan Redraw Facilities
With any saving strategy, you’ll need to consider the benefits and the potential disadvantages. So, there are certainly more factors to consider before deciding on a redraw facility:
- Redrawing funds from the facility could end up increasing your home loan repayments. Be sure to enquire with your lender before going ahead. You don’t want to end up with a mortgage that you can’t afford.
- The funds in your redraw facility are not as easy to access as those in an offset account. For example, an offset account allows you to deposit and withdraw money freely, whereas, with a redraw facility, you’ll have to apply with the lender to access the funds.
How Can The Mortgage Agency Help You?
Redraw facilities can be a great way to save some money that you can access later or pay off your home loan faster.
For example, the additional payments can help reduce the amount of interest you pay over the home loan term, significantly reducing how long it takes to pay off your mortgage. You also won’t be taxed on any of the savings in your redraw facility.
So while you may not be earning any interest on your savings, you’re saving a whole lot of money by reducing your interest on your home loan.
However, as with any savings or investment strategy, you’ll weigh up the benefits and potential disadvantages of your current financial circumstances and future financial goals, so it’s worth consulting with a mortgage broker to see what’s going to suit your needs.
At The Mortgage Agency, our mission is to help you achieve your goals and guide you in every step of the property buying journey by implementing a solid home loan plan.
We seek to understand our customers and provide them with a solid grasp of home loan fundamentals. So, if you’re considering opting for a redraw facility, we can assess your circumstances and see whether it would suit them. If a redraw facility isn’t the answer, we can guide you on a few alternative solutions.
Remember, home loans are never a one-size-fits-all scenario, so if you would like to discuss your options regarding redraw facilities, book a consultation with one of our expert mortgage brokers today.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.