Redraw Facility

All You Need to Know About Redraw Facilities on Your Mortgage

Quick quote

Redraw Facility

Are you in the process of exploring the market to buy property and take on a home loan? If yes, then you might have heard the term ‘redraw facility’ floated in discussion surrounding mortgages.

Redraw facilities are one among many possible features that lenders can offer as a component of their home loan products. In this article, you can find out everything about these facilities, and walk away with all of the information you need to inform your decisions when making comparisons between redraw facilities using Savvy’s online home loan comparison tool.

What is the Definition of a Redraw Facility?

A redraw facility is a feature that works by affording a home loan customer the option to withdraw funds that they have already paid towards their loan as extra repayments on top of their minimum required instalments. These funds can be used as cash for whatever use the customer desires, and the redraw facility can be ‘replenished’ by future advance payments towards the loan.

Redraw facilities are distinct from offset accounts in the sense that, while offset accounts function as regular debit accounts by giving the customer direct access to the funds in the account, redraw facilities cannot be immediately accessed and might also impose a fee for access to these funds.

Put succinctly, redraw facilities provide a way for mortgagees to access funds in between their current loan balance and their original approved loan amount. If your equity has grown and you required more funds, you can usually borrow more based on the property new valuation but this would require a new loan application and approval to be submitted.  

How Exactly Can a Redraw Facility Help Me?

The benefits of redraw facilities are that they provide you with the option to access funds which you have previously paid as extra repayments towards your home loan. This allows you to be confident in making extra mortgage repayments as you will be able maintain your financial flexibility moving forwards, while also making extra savings over the life of your loan in the form of interest expenses.

To illustrate how a redraw facility can be useful, it helps to look at an example:

Rob has taken out a home loan of $400,000 with a 3% interest rate and a 30-year term. If Rob’s minimum monthly loan repayments including interest and fees are $1,686, but Rob pays an extra $500 per month for a total monthly payment of $2,186, then over time he contributes extra payments which can later be redrawn. After 12 months of repayments made at a rate of $2,186 per month, Rob will have a total of $6,000 which he can then access in the case of an emergency or for another purpose.

Two years later, Rob decides to carry out renovations on his property and has $12,000 in his redraw facility which he can choose to access. His renovations will only cost $8,000, so he chooses to withdraw this amount, leaving the rest in his redraw account to continue to lower his interest expenses moving forwards.

How Should I Compare Home Loans with Redraw Facilities?

When using comparison tools such as Savvy’s to compare home loans with redraw facilities, there are several aspects of a loan that you should consider. It will be worth considering whether or not various redraw facilities will incur extra fees, and comparing these fees between different lenders.

It is also important to bear in mind when comparing lenders in this context, that depending on the LVR of your prospective loan, some lenders may not offer redraw facilities. Additionally, you will want to take note of which lenders offer redraw facilities for which loan types. For example, some lenders might not offer a redraw facility for an interest-only loan, whereas others might.

Want to Know More About Redraw Facilities?

Answers to More Questions Commonly Asked by Home Loan Customers

If I have a redraw facility, am I better off depositing my money into a savings account or making extra payments towards my home loan?

The answer to this question depends on your priorities, but from a purely financial perspective, often your best choice will be to make extra payments towards your home loan with the possibility of accessing these later. This is because the interest rates on home loans are most often higher than rates offered by fixed-term deposits or high-interest savings accounts. This means that when comparing the potential savings on interest expenses against the potential interest returns from a savings account, you will generate more surplus cash flow over the long-term by making the extra payments towards your home loan.

What do I need to do to get a redraw facility?

Most lenders will offer redraw facilities as a part of your home loan package. By comparing the options available to you using Savvy’s comparison tools, you can easily view which loan features are offered by different lenders, as well as the rates offered on loans with different features included.

Why would I choose a redraw facility over an offset account?

Essentially, the benefits in choosing a redraw facility over an offset account lie in the decreased temptation to spend money because of its greater restrictions to accessing funds compared to an offset account. While you will enjoy interest savings from both, because your offset account acts as a debit account for all intents and purposes, you will find it much easier to access and spend this money. Because you must apply to access credit from your redraw facility, you will be more able to carefully consider whether you do need to access the funds, increasing the likelihood that you will continue to benefit from the interest savings that this facility affords you.

 

Will there be any extra cost for me to have a redraw facility?

There might be extra costs for you in the form of higher interest rates, depending on the inclinations of the lender and the strength of your application. Most lenders will also charge fees for accessing funds through your redraw facility.

Is there a minimum and maximum amount of credit I can access with a redraw facility?

There is no minimum amount of credit that can be accessed from your redraw facility. In terms of the maximum amount, this will equal to the sum of extra payments you have made towards your mortgage, provided your property has not decreased in value since the time of your deposits.

 

Are there any other tips I should be aware of for using a redraw facility?

A helpful thing to keep in mind is that, in order to maximise the effectiveness of your redraw facility, you need to actually use it! It might sound simple, but entering into a loan agreement which might require an extra fee in order to include a redraw feature is useless unless you utilise the feature for the advantages which it can offer you.

 

Secondly, you should try to limit your use of the redraw facility to times when you absolutely must access this money. By exercising this discipline, you will minimise the cost of fees incurred for withdrawals and will ultimately make a greater saving over the long-term.