Most home loan products available in Australia these days include a redraw facility. It’s an extra feature that can help you pay off your mortgage quicker, as well as bring down your interest bill, so it’s well worth getting your head around exactly how it works.
What is a redraw facility?
A redraw facility allows you to access any extra payments you have made on your mortgage. Paying more than the minimum repayments each month reduces the principal amount owed, and therefore your interest bill. Most lenders allow borrowers to make extra payments, but if your loan allows a redraw, you can make these extra payments safe in the knowledge that if the need arises, you can ‘redraw’ it back out again.
Benefits of a redraw
Save on interest
A redraw can mean reassurance for people who are apprehensive about whether they can afford to overpay on their home loan, and allow them to benefit from a reduced interest bill. Any extra repayments on your mortgage reduces the outstanding principal amount, which is what interest is calculated based on. Even small overpayments can quickly add up to major savings on your total interest bill.
Imagine you borrow $500,000 at 5% p.a over 30 years. Using the Your Mortgage home loan repayment calculator, this is how different sized regular overpayments could reduce your total interest bill.
|
Overpayment (Monthly) |
Potential savings over life time of loan |
Total interest bill |
|---|---|---|
|
$0 |
$0 |
$466,278.96 |
|
$10 |
$4,686.25 |
$461,592.71 |
|
$100 |
$42,598.83 |
$423,680.13 |
|
$1,000 |
$227,737.76 |
$238,541.20 |
Pay off your home loan quicker
The other major benefit of overpaying on your home loan is potentially paying the loan off faster, since overpayments go towards paying down the principal. Returning to the above example, regular $100 overpayments would see the loan paid off before the end of year 28, rather than 30. Putting $1,000 extra into that same loan each month would mean the loan would be paid off in less than 18 years.
Often better value than deposit accounts
Excess funds put into your home loan are effectively earning the same interest rate you are paying on your home loan. Say you put $10,000 into your home loan, paying 5% p.a. After twelve months, you have saved $500 on your interest bill ($10,000*0.05). Had you instead put this amount into a savings account paying 4% p.a, you would have earned $400, but would have paid that extra $500, so end up worse off. Since home loan rates are generally significantly higher than deposit products, overpayments tend to be better value. Even if you eventually have to withdraw it, the savings made before you had to redraw are likely larger than the equivalent earnings had you instead had that money with a savings account on a lower rate.
Drawbacks of redraw facilities
Extra fees and higher rates
Home loans that include extra features like redraw facilities tend to have higher rates, as well as bigger fees. Some loans have a redraw activation fee incurred whenever the borrower wants to use the redraw, while others charge a fee for every redraw.
Redraw conditions
Unlike offset accounts, accessing the money in a redraw isn’t as simple as just taking money out of an account. You will likely need to make a redraw request, which normally isn’t instant, while there might also be limitations on how often the account can be redrawn. There might also be limitations on the minimum and maximum amount that can be redrawn.
Comparing redraw facilities
As the terms and conditions of redraw facilities differ significantly among lenders, it is important to understand what's on offer before you take out the loan.
Before making any decision there are a number of details to have a look at, including:
1. The fee for having a redraw facility.
Some loans charge a flat fee for having a redraw facility. In some instances this is not charged upfront; it is described as a redraw activation fee and charged only if and when the borrower wishes to use the redraw facility. Once the redraw facility is activated the borrower can use it as often as they like.
2. The fee per redraw
This is the amount borrowers must pay each time they withdraw funds from their loan account using the redraw facility. This fee varies significantly between lenders and loans. Some lenders charge up to $50 per redraw, while others charge nothing at all.
3. The number of free redraws per year
Some redraw facilities grant the borrower unlimited free redraws while some lenders offer a number of free redraws per year. Once the quota of free redraws is exceeded the borrower must pay the fee per redraw. For example, if a redraw facility grants four free redraws a year and has a $25 redraw fee, the borrower only pays $25 fee on the fifth redraw of the year – and any further redraws they make before the year draws to a close.
4. The maximum number of redraws per year
Some redraw facilities limit the number of redraws the borrower can make within a set period, usually a year. Once this number is exceeded the borrower cannot access additional repayments they have made.
5. The minimum redraw amount
Redraw facilities often have a minimum amount which can be withdrawn. With some loans there is no minimum, with others it is as high as $5,000. This determines the true flexibility of a redraw account and what truly sets it apart from an all-in-one account.
6. The maximum redraw amount
The maximum redraw amount is the largest amount you can withdraw at any one time. In most cases this is equal to the total of additional repayments you have made.
Some redraw facilities set the maximum as the total of additional repayments less one month’s repayments. Others set a fixed amount that you can withdraw regardless of how much more extra you may have paid.
What about an offset account?
An offset account is similar to a redraw in that it gives borrowers the option to withdraw any extra money they pay towards their home loan. The difference is that an offset account is a transaction account, linked to the home loan, the balance of which is ‘offset’ against the outstanding principal amount. If you owe $500,000, but have $50,000 in an offset, your interest bill is calculated based on you owing $450,000. Offset accounts function like normal transaction accounts, so the money can usually be accessed instantly.
Offset accounts can be 100% offset, where the full account balance is deducted from the loan term, or partially offset. If the above example was 50% offset, the interest bill is calculated on an outstanding balance of $475,000 ($500,000-0.5*$50,000).
Is a redraw facility right for you?
Although overpayment and redraw facilities offer many advantages, the benefits will only benefit the right type of borrower, so it's important to determine whether this facility will suit both your personal circumstances and your personal approach. There is no point paying for something you are not going to use, so if it’s unlikely you’ll be able to make additional repayments on your home loan in the foreseeable future, there isn’t much point paying a higher interest rate to have a redraw facility. For those who can afford to make overpayments though, a redraw can be a great means to lower your interest bill and potentially pay off the loan sooner.
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Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.04% p.a. | 6.06% p.a. | $2,408 | Principal & Interest | Variable | $0 | $530 | 70% | Featured Online ExclusiveUp to $4k cashback |
| |||||||||
5.99% p.a. | 5.90% p.a. | $2,396 | Principal & Interest | Variable | $0 | $0 | 80% |
| ||||||||||
6.14% p.a. | 6.16% p.a. | $2,434 | Principal & Interest | Variable | $0 | $250 | 60% |
| ||||||||||
5.95% p.a. | 5.95% p.a. | $2,385 | Principal & Interest | Variable | $0 | $0 | 90% | |||||||||||
5.94% p.a. | 5.95% p.a. | $2,383 | Principal & Interest | Variable | $0 | $0 | 90% |
Collections: Extra Repayments Redraw Facility Offset Accounts
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