A redraw facility is a feature of certain types of loans (usually home loans) which allows the borrower to access extra contributions that have been made to the loan.
While drawing on these funds will reduce the benefit of paying more into the loan than you’re required to, having an extra pool of cash at your disposal can be very handy if needed.
While most lenders allow borrowers to use their home loans as additional transaction accounts, the decreased flexibility offered by a simple redraw facility may seem a bit out of date, but this is not necessarily the case. Many loans with a redraw facility can represent great value, enabling the borrower to pay less interest over the life of the loan when compared to say loans with certain types of offset accounts.
A home loan that allows additional payments and has a redraw facility can be an excellent savings tool. There are two main benefits to putting your money into your home loan rather than a savings account.
- Excess funds put into your home loan are saving you the same interest rate being charged on your home.
- By contrast money you have in a savings accounts, generally pays much lower interest rates and that interest is taxable income.
Used wisely, redraw facilities can be a cheap and effective way to minimise the amount of interest you pay on your mortgage while cost effectively using any excess funds you have at your disposal.
To be able to use a redraw facility, you first need to make additional payments on top of your minimum loan repayment schedule. This includes one-off lump sum repayments or regularly paying a certain amount, say $100, more than the required minimum repayment.
If you decide to keep these extra funds on your loan, these additional repayments will reduce the amount of interest you repay over the term of the loan and shorten the time it takes to pay off the loan.
As the terms and conditions of redraw facilities differ among lenders, it is important to understand what’s on offer before you take out the loan. Before making any decision there are a few details that first need to be checked, including:
- Is there a fee for having a redraw facility?
- Is there a fee per redraw or are there free redraws.
- Is there a maximum number of redraws per year?
- Is there a minimum or maximum redraw amount?
To be able to choose the most suitable redraw facility, you need to have a good idea of how you are going to use it. There is no point paying for something you are not going to use. If you are unlikely to be able to make additional repayments on your home loan in the foreseeable future, there is little point in paying a higher interest rate or a fee to have a redraw facility on your home loan.
No it is not, although the outcome can be similar. See this article /offset-accounts-vs-redraw/