Redraw Facility Explained With Tips to Lower Your Mortgage
What exactly is a redraw facility, how does it work, and what should you look out for?
06 Feb, 2024
Extra & lump sum payment calculator
How much could you save by making extra repayments on your home loan? Some mortgage holders could save hundreds of thousands in mortgage interest just by diverting spare cash to their home loan!
Find out how much you could save by using Your Mortgage’s Extra & Lump Sum Payment Calculator.
Loan details
Loan Amount
Max $2,000,000
$
Interest Rate
%
Loan Term
Max 30 years
years
Extra repayment
Extra Repayment
$
Extra Repayment starts from
year
Lump sum
Lump Sum Amount
$
Payment starts from
Max 30 years
year
Your estimated results
By paying extra, you could reduce your loan term by 0 year 0 month and save $0.00 in interest.
Summary
Loan amount
$0.00
Interest rate
0.00%
Loan term
30 years
Repayment frequency
Monthly
Extra repayments
$0.00
Start extra repayments from
0 year
Lump sum amount
$0.00
Payment starts from
0 year
Monthly repayment
$0.00
Total loan repayment
$0.00
Total interest paid
$0.00
Total interest saved
$0.00
Loan term saved
0 year 0 month
How making extra or lump sum payments could save you thousands
A home loan can be a big commitment! Mortgages typically span decades - that's a long time to be making repayments and incurring interest. Reducing the life of your home loan could save you tens, if not hundreds of thousands of dollars.
By paying more than your required mortgage amount or making a lump sum payment, you can reduce the principal amount owed to your lender. Since interest is calculated based on the principal, lowering this amount reduces the total interest charged.
The sooner you can contribute extra money beyond your standard monthly repayments, the more effective this strategy becomes.
Are there downsides to making extra or lump sum repayments?
Despite these benefits, there can drawbacks of making extra payments.
Most notably, fixed-rate borrowers might be charged a 'break fee' if they pay extra on their home loan. Therefore, it's essential to check the terms of your mortgage before making extra or lump sum payments. Alternatively, consult with a financial adviser, accountant, or mortgage broker to decide whether this repayment strategy suits you.
Another downside of making extra repayments is that you could loose access to that money. While most home loans on the market now offer redraw facilities - which allow borrowers to 'redraw' extra repayments - it's typically not as easy to redraw funds from a mortgage as it is to move them from, say, a savings account.
How our Extra & Lump Sum Calculator works
To perform its number-crunch, Your Mortgage's Extra & Lump Sum Calculator will ask you to provide a few important pieces of information, including:
- The principal balance on your home loan
- Your annual interest rate
- The amount you want to pay in addition to your regular repayments
- When you plan to begin making additional repayments
- Whether you wish to make a lump sum repayment on your home loan
Looking for a competitive home loan?
Securing the right home loan for your needs can be pivotal to your financial success. Here are some of the lowest rate mortgage products on the market right now.
Important Information and Comparison Rate Warning
What is better: A large lump sum or regular extra payments?
Deciding whether to make one large lump sum payment or many smaller extra payments is a personal choice.
However, saving up for a large lump sum payment isn't typically the best course of action.
It can take time to save, and during that time, you'll continue to pay interest on each dollar owed on your mortgage. If you plan to allocate extra funds to your home loan, it's best to act as soon as possible. The earlier you make these payments, the more interest you will save.
That said, making a lump sum payment can instantly reduce the principal amount, which shortens the loan term and reduces the total interest owed. So, if you have a lump sum available, it's often beneficial to apply it to your home loan rather than gradually making extra payments.
Extra or lump sum repayments vs. using an offset account
Instead of making extra or lump sum payments, you could consider placing extra funds in an offset account.
An offset account operates like a transaction account, but it's attached to your mortgage. When you deposit money into your offset account, that money is 'offset' against your mortgage's principal balance, so you won't pay interest on it.
Using an offset account can help pay down your mortgage faster, as the portion of your repayments going towards interest will be lower. Plus, money in an offset account can be easily added to or withdrawn as needed.
Beware, however, that certain offset accounts will only use a portion of the funds within them to 'offset' the principal balance - it's not uncommon for that portion to be around 80%.
Frequently Asked Questions
Making mortgage repayments weekly or fortnightly rather than monthly can save you interest.
By switching to weekly or fortnightly repayments, you end up making more repayments each year. There are 26 fortnights in a year, which is equivalent to 13 monthly repayments.
Additionally, since interest is often calculated daily, making more frequent repayments reducing the principal more regularly, potentially saving you a small amount of interest each month.
How much you can save by making extra repayments will depend on how often you make additional repayments and how large the extra repayments are, as well as the size of your home loan and its interest rate.
By starting to make extra repayments early and being consistent, it’s possible to save hundreds of thousands of dollars over the life of a mortgage.
If you’re considering making additional repayments, the calculator above can tell you how much you could save by doing so.
Typically, you won’t be able to make unlimited extra repayments on a home loan with a fixed interest rate without incurring a ‘break fee' penalty.
That penalty can be substantial, so it could be worth checking with your lender before making extra repayments on a fixed rate home loan.
However, once the fixed rate period ends and the mortgage reverts to a variable interest rate, borrowers can often make unlimited additional repayments without penalty.
How much time you can shave off your home loan’s life by making extra repayments will depend on how large your extra repayments are and how frequently you are making them.
For example, let’s assume you have a $400,000 home loan with a 5% interest rate over a 30-year loan term. Without making any extra or lump sum repayments, your monthly repayments would be $2,147.
If you were to pay an extra $400 every month, you could slice more than eight years off the life of your loan and save over $113,000 in interest.
If you were to pay $600 extra a month, meanwhile, you could wipe more than a decade from your loan’s life and save upwards of $145,000 in interest.
First, you need to double check with your lender to make sure it allows additional repayments.
If the answer is yes, the process is quite simple. Chances are all you need to do is increase the amount you pay when submitting your regular mortgage repayment. Even an extra $10 each month can add up.
You typically can access the money used to make extra repayments through your home loan’s redraw facility. Though, its worth noting that not all home loan products will offer redraw facilities.
Alternatively, you could consider refinancing to tap into the equity built-up through your repayments.
It’s worth remembering that, no matter how you choose to claw back those funds, doing so means you’ll likely end up paying more in interest than you would otherwise.
Since 1995 we've been helping Australians learn about home ownership, compare home loans and get help from home loan specialists to find the right home loan for them.
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