What is a redraw facility?
Overview
When shopping for home loans, you might discover new terms you hadn’t heard of before.
This guide will take you through one of the most common: redraw facility.
We’ll explain what a redraw facility is, why you might want one, and what to look out for when shopping for home loans with redraw.
Key Points
A redraw facility allows you to withdraw any extra repayments you’ve made towards your home loan. You can then use the funds for things like paying off credit card bills, doing repairs, or making a large purchase.
Not all home loans have a redraw facility, and terms and conditions vary between loans. Be aware that some lenders charge a fee for redraws or require that you withdraw a minimum amount each time.
Alternatives to redraw facilities include offset accounts, savings accounts, or term deposits.
What is a Redraw Facility?
A redraw facility is a home loan feature that allows you to make extra repayments on your home loan, then withdraw them for use at a later stage.
By making extra repayments, you're reducing your principal loan amount, which in turn reduces the amount of interest you pay and saves you money.
However, with a redraw facility, you can still access those funds for emergencies or other reasons.
Do All Home Loans Have a Redraw Facility?
Not all home loans have a redraw facility; it depends on the lender and the loan.
Redraw is usually less restricted with variable rate loans, which may allow you to make unlimited extra repayments and redraw them at your discretion.
However, fixed rate loans often offer limited redraw, if at all.
Some loans may implement a minimum redraw amount, such as $100, $500, or even $1000.
Minimum redraw amounts are sometimes associated with the method you use to redraw funds.
For example, redrawing at a branch may have more rules than redrawing online.
Some loans may also charge a redraw fee, while with others the feature is free.
As you can see, the redraw feature can vary widely across home loans.
Here are some potential redraw terms and conditions to be aware of when comparing loans:
Minimum redraw amount
Maximum redraw amount
Maximum number of annual redraws
Fee for redrawing funds
Fee for having a redraw feature on your account
Cap on number of times you can redraw for free
Borrowers who do not expect to use the redraw facility may not be concerned with redraw caps or fees; however, these borrowers may be better off with a cheaper loan that doesn't offer a redraw function.
On the other hand, borrowers who intend to use the feature frequently will likely be better off with free unlimited redraws.
How a Redraw Facility Works
A redraw facility does not let you withdraw all of the funds in your home loan account.
You'll only be able to withdraw funds above the minimum required repayments.
If you redrew the minimum repayments, you would not be meeting the terms of your loan.
Before you can take advantage of redraw, you'll need to make additional repayments.
This means you'll need to meet your minimum repayment requirements, then pay funds into your loan on top of this amount.
Some borrowers choose to make regular repayments, while others prefer to deposit lump sums into the home loan account when convenient.
Whichever way you do it, it's a great trick to paying off your loan faster.
But what happens if you need those funds back in a hurry?
If your water heater quits working or your car needs repairs, you may wish that you hadn't locked those funds away in your home loan.
A redraw facility lets you tap into those extra repayments if you need them, so you can pay down your home loan quickly without worrying about losing access to emergency funds.
Borrowers should be aware that funds generally cannot be redrawn for business purposes.
After you redraw funds, you may notice that your repayments have increased.
By accessing your available redraw, you're essentially increasing the principal, or your remaining loan balance.
Once that happens, interest will be calculated on a larger loan balance, which may translate into higher repayments.
For example:
You have a 25-year loan with a 4% interest rate.
Your loan balance is -$300,000, including $10,000 available for redraw. Your monthly repayments are $1584.
If you redraw that $10,000, your loan balance becomes -$310,000 and your monthly repayments increase to $1636.
Depending on your loan's terms and conditions, you may be able to make additional repayments at any time, which could then reduce your repayments again.
How to Redraw Funds
Most lenders offer a number of ways that you can redraw funds, including:
Online: simply transfer the funds from your home loan account to your transaction account.
Over the phone: Request a redraw by phone (operating hours usually apply).
At a branch: Visit the lender in person to request a redraw.
Via ATM: Withdraw the funds using a debit card.
Benefits of a Redraw Facility
When used wisely, a redraw facility can be a useful feature on your home loan; it can even save you money.
Pay down your loan faster while retaining access to your funds
With redraw, you can make extra repayments without worrying that you won't be able to get them back later if you need them.
If you don't need them, you're chipping away at your principal.
If you do need them, you won't be any worse off than if you'd made only the minimum repayments.
In fact, you could be better off thanks to the money you've saved on interest.
Reduce your interest
Making extra repayments doesn't just help you pay off your loan faster, it means that you pay less.
When you put additional funds towards your home loan, you'll reduce the principal and accrue less interest.
Get more for your money
The interest rate on a home loan is generally higher than an interest rate on a savings account.
That means that you're saving more money on interest through your home loan than you would earn by having those same funds in a savings account.
On top of that, interest you earn through a savings account can be taxed, as it is considered income.
That's why many people opt to save money through a home loan account with a redraw facility: you're reducing your home loan interest but still able to save for new purchases, such as a holiday or a car.
Limitations of a Redraw Facility
The downsides of a redraw facility are those fees and charges we talked about earlier.
If your home loan charges you for redrawing, or requires a minimum redraw amount, it may become less cost-effective to access money through redraw.
If you're only redrawing funds once a year, however, it may still work in your favour.
The same goes for redraw facilities that don't charge fees, because you're free to redraw as often as you'd like.
If you're using your redraw facility to save up for a big purchase, be aware that some loans (usually fixed rate loans) cap the amount of additional repayments you can make.
For example, you may only be allowed to make extra repayments up to $10,000 per year.
Alternatives to Redraw
Borrowers can also explore a couple of other options that are similar to the redraw feature.
You can use one or more of these options alongside or instead of a redraw facility.
Offset account
An offset account is a transaction account that is linked to your home loan account.
When your lender calculates interest on your home loan, they will subtract the amount in your offset from the principal amount owing.
Interest is then calculated on this reduced amount.
The advantage of an offset account is that it is separate from your home loan, while still reducing your interest.
The downside is that there may be a cost for having the offset account, either an account fee or a higher interest rate on your home loan.
Savings account
If you prefer to keep your savings totally separate from your home loan, you can go with a traditional savings account.
The account will not be connected with your home loan, and you can deposit and withdraw funds as you please.
However, remember that the interest you earn through a savings account will likely be lower than the interest you save by using a redraw facility.
Term deposit
A term deposit is a savings account with a higher interest rate, but you must agree to keep the funds untouched for a fixed period of time.
Some people prefer to use term deposits as a way to enforce savings, but there may be a break fee if you want to take the money out earlier.
Comparing Home Loans with Redraw
If you like the sound of a redraw facility---and many borrowers do---there are a few questions you can ask yourself when comparing home loans.
Does this loan have a redraw facility?
Are there any fees associated with the redraw feature?
Is there a minimum or maximum redraw amount?
How am I likely to use the redraw feature?
Will the upsides of the redraw facility cancel out any associated costs?
There are plenty of options on the market for home loans with a redraw facility, so you are in a good position to shop around.
Remember that by comparing home loans, you could save both time and money on one of the biggest purchases you're likely to make.
Compare & SaveThis guide is opinion only and should not be taken as financial advice. Check with a financial professional before making any decisions.
