Redraw Accounts Explained

By Nila Sweeney

Q In the standard variable rate home loan, extra payments go into the re-draw account. Only the standard monthly instalment is taken from this account to pay off the loan and the remainder stays in the re-draw account. The redraw balance is taken off the principle due on the loan to calculate interest. Is this correct? If so, when the term of the loan is coming to an end and the principle left to be paid on the loan is equal or less than what is in the re-draw account can the loan be paid out early?

A Your understanding of the redraw facility is excellent and the points you have raised are absolutely correct. The beauty of having the redraw account is that you are able to utilize the surplus funds held in this account at any stage. These funds can be used for the purchase of a motor vehicle for example, or the deposit for the purchase of an investment property, etc. Obviously this will depend on how much you have built up over a period of time. Should you not wish to undertake any of the aforementioned then yes you are able to pay out your loan when the balance of the redraw account equals or is greater than the loan amount. You must also take into consideration the length of time that the loan has been running to ensure you do not incur a penalty. Good luck and thanks for your query,