What is a home loan redraw facility and what benefits can it offer you?
When comparing home loans, most people will come across a number of terms and phrases they’ve never heard before. One of these loan features is a “redraw facility”, and it’s a common part of many home loans. A redraw facility allows you to access the extra repayments you have made towards your loan amount, providing access to funds whenever you need them.
So how does this loan feature work and how can it be used to benefit you? Read on to find out.
What is a redraw facility?
A redraw facility is a common feature of home loans that allows you to make extra repayments. By making additional payments ahead of schedule, you can reduce the amount of interest charged on the loan and pay the total amount off quicker.
However, you may find that you need access to the additional repayments you have made, for example to finance renovations or a family holiday. This is where a redraw facility comes in. It allows you to access those additional funds in your loan account, providing peace of mind that your additional savings will not be locked away if your financial circumstances change.
Think of a redraw facility as an account attached to your home loan. The balance of that account is the amount of extra payments you’ve made towards your loan. It allows you to be disciplined with your money and minimise the interest charged on your loan, but with the added flexibility of being able to access those funds if you ever need them.
A redraw facility is different to an offset account, which is a savings account that is linked to your loan to offset your loan balance and therefore minimise interest payments. Check out our guide to the difference between redraw facilities and offset accounts for more information.
What types of home loans offer redraw facilities?
An increasingly popular feature of Australian mortgages, redraw facilities are available on loans where you are allowed to make additional repayments ahead of schedule. This means they are most commonly associated with variable rate loans, but there are also many fixed rate loans that include redraw facilities. Redraw is offered on owner-occupier and investment loans.
Are there any fees associated with redraw facilities?
In some cases, your lender will charge a fee each time you access the redraw facility. For example, this fee could be $20 or $25, so you’d need to withdraw larger amounts from your account in one go rather than several smaller amounts.
Sometimes the redraw fee can vary depending on how you access the funds. For example, while online and phone redraws are free, staff-assisted redraws in a branch may incur a fee.
However, there are some lenders that offer an entirely free redraw facility, allowing you to access funds at any time without incurring any additional fees. You may also find that your loan comes with a certain number of free redraws, after which a redraw fee applies to each withdrawal.
Other things to be aware of with a redraw facility
When considering a home loan with a redraw facility, there are several other factors you should consider, including:
- Minimum redraw amount. Some lenders will impose a minimum limit on the amount you can redraw in each transaction, for example $500. This can be quite restricting if you are likely to only want access to small amounts. A maximum redraw limit may also apply, but in most cases this is equal to the total of your additional repayments.
- Redraw limits. Some lenders will impose a limit on the number of withdrawals you can make from a redraw facility each year. Other lenders may only offer a limited number of fee-free withdrawals before you will start incurring an extra penalty every time you use the facility.
- Debit card. Some home loans will provide you with a debit card that you can use to access the redraw facility. If this is the case, check out the size of the lender’s ATM network to ensure that you can access your money easily and conveniently without incurring ATM withdrawal fees.
- Interest rate. Home loan features such as redraw facilities and offset accounts can drive the interest rate on your mortgage up. With this in mind, make sure you will get adequate use out of your loan’s redraw facility before accepting the higher interest rate.
Using your salary to reduce home loan interest
We’re all looking for ways to help us pay off our mortgage as quickly as possible, and a redraw facility allows you to do just that. The trick is to have your salary paid straight into your mortgage account rather than a completely separate transaction account. This means you can use the loan’s redraw facility to enjoy access to the funds you need to pay for day-to-day expenses, but the higher balance in your loan account will reduce your ongoing interest payments.
For example, let’s say you earn $6,000 a month and your mortgage repayments are $2,500 a month. This means you have an extra $3,500 left over each month – this money will go towards your regular living expenses, but you won’t spend it all at once.
So by having your entire monthly pay deposited straight into your mortgage account, and using the loan’s redraw facility to pay for expenses as they arise, your interest payments will only ever be calculated on a lower outstanding loan amount. Home loan interest is calculated on the outstanding balance at the end of each day and then added together and charged at the end of the month, so this strategy can deliver significant savings.