What is a Home Loan Redraw?
Whether you’re searching for your first home loan or you’re in the process of paying one off, there are an abundance of home loan features you’ve likely come across: everything from offset accounts and extra repayments to split loan facilities.
One of the most common features is home loan redraw, otherwise known as a redraw facility. But what exactly is a home loan redraw, how does it work and what are the benefits and drawbacks involved? Read on for a full rundown.
Home loan redraw meaning
Before we dive in, let’s start with a simple definition: Home loan redraw (or redrawing) refers to the act of withdrawing extra repayments you’ve already made towards your home loan, to be used for another purpose.
How does a home loan redraw work?
First things first – we need to talk about extra repayments, because they’re inextricably linked to redraws.
Extra repayments are exactly what you think: additional payments made towards a home loan on top of the minimum repayments. Borrowers make extra repayments to pay off their loans faster and to reduce the amount of interest they pay. You can see exactly how much of an impact they can make by taking our extra repayments calculator for a spin.
Home loan redraw scenario
Rose and Joey are paying off a $500,000 home loan and the minimum repayment they need to make is $2,000 a month. However, if they wanted to pay off their loan faster they could also make extra repayments on top of that $2,000 – say, an additional $100 a month.
Now, here’s where home loan redraw comes in.
Over the years Rose and Joey have made $7,000 in extra repayments, but now they’re thinking about doing some renovations on their kitchen. Using the redraw facility which is attached to their home loan, they can actually dip into that $7,000 in extra repayments they’ve made and put it towards paying for renovations.
Of course, it’s not quite as simple as that. Not all lenders allow redraw, and in some instances you might have to activate the redraw facility before you can access your money – either through an online form or a form which you’ll need to submit in-person at a branch. But we’ll go through the pros and cons of redraws further below.
Redraw vs home loan offset account
At this point you might be thinking that making extra repayments and using a redraw facility sounds pretty similar to the way an offset account functions. It’s true that both give mortgage holders the ability to reduce the interest on their home loans, but there are also some notable differences:
- Structure: At the most basic level, an offset account is a separate deposit account (like a bank account or savings account), whereas a redraw facility is more of an add-on to your home loan.
- Flexibility: Because they are deposit accounts, offset accounts can offer more flexibility than a redraw facility. Mortgage holders can use one just like a normal bank or savings account to deposit and withdraw money, make transactions and even to have their salary paid into.
- Speed: While customers are able to access and move money in and out of an offset account at the speed of a normal bank account, accessing money from a redraw facility can sometimes take a couple of business days.
Of course, there’s much more to offset accounts. So make sure you check out our offset account guide for a full explainer on how they work and why they’re a useful feature to have.
Pros of a redraw
- Making extra repayments can be a simple way to pay off your loan faster and reduce the interest you pay, but having access to a redraw facility may provide that extra sense of freedom should you need that money down the track.
- You can grow your redraw balance through regular payments, but you can also make one-off payments (depending on any caps) – for example, an inheritance or work bonus.
- If you need to dip into your redraw balance to upgrade your car, using the money in your redraw facility could be more cost effective than taking out a personal loan
Cons of a redraw
- There are often limits on the amount of extra repayments borrowers can make (e.g. $20,000 annually), as well as minimum or maximum amounts you’ll actually be able to redraw.
- Many lenders don’t charge borrowers a fee to make a redraw, but there are certainly a number that do.
- The vast majority of variable home loans will feature a redraw facility, but it’s less common with fixed home loans.
- As mentioned, when comparing a redraw facility to an offset account it’s worth considering that money held in a redraw facility can be harder to access. Although this could be a positive for people who find it a bit too easy (and tempting) to spend the money in their offset account.
Tips and traps of home loan redraws
- Tip 1: Your home loan interest rate is almost certainly going to be higher than any rate you’ll be able to get on a savings account or term deposit. So making extra repayments or stashing your savings in an offset account could be a savvier way to use your money.
- Tip 2: Did you know that most lenders allow borrowers to access their redraw facility online or through an app? That way you manage your redraw needs without having to make a phone call or set foot in a branch.
- Trap 1: It may sound obvious, but once you’ve withdrawn money from a redraw facility your home loan balance will increase. So it’s worth making sure that any redraw you make is put to good use and weighed up against the size of the repayments you’ll need to make going forward and the length of time it might add to paying off the loan.
- Trap 2: While rare, there have been a few notable cases where banks have made changes which have limited or reduced the functions of redraw facilities. While lenders should give their customers plenty of notice, it’s worth reinforcing the point that changes can be made.
Home loan redraw FAQs
How often can I redraw?
The frequency with which you can redraw really depends on your home loan because some lenders offer unlimited redraw for free, while others will place a cap on the number of free redraws you can make over a certain period (e.g. one free redraw per month). It’s also worth remembering that some lenders also set minimum redraw amounts (e.g. at least $2,000 per redraw).
Can I redraw on a fixed home loan?
While redraw facilities do tend to be a more common feature of variable home loans, there are still a sizable number of lenders which offer them with fixed home loans, many of which come without an extra fee attached.
What does ‘available redraw’ mean?
Available redraw is simply the figure which shows you how much you’ve contributed via extra repayments towards your home loan and how much you have available to draw down upon should you need to.
Does a redraw facility cost extra?
There are plenty of lenders out there that don’t charge borrowers a specific fee to use a redraw facility. However, some can charge a $10, $20 or even $50 fee per redraw, so if a redraw facility is a feature you’re likely to use – even on a semi-regular basis – it may be worth opting for a home loan that doesn’t cost you extra.
Looking for more information? Reach out and let’s talk.
Source: Tom Watson
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