Ultimate Guide to Home Loan Redraw Facility

You’ve been diligently making extra repayments on your home loan, watching your balance shrink faster than expected. But then, life throws you a curveball with an unexpected expense, or you suddenly get a time-sensitive investment opportunity. Wouldn’t it be great if you could access those extra funds you’ve paid into your mortgage? You could if you choose a home loan product with a redraw facility. 

Today, let’s talk about the redraw facility—how it works, why you should look for it when shopping for home loans and how to maximise it over the life of your loan. 

What Is a Redraw Facility & How Does It Work?

A redraw facility is a feature offered by many Australian lenders that allows you to access additional payments you’ve made on your home loan. 

Say your minimum monthly repayment is $2,000, but you’ve been paying $2,500 for the past year. That extra $500 monthly (totalling $6,000 over the year) helps reduce the principal amount owed and potential interests. It also sits in your redraw facility, ready for you to access if needed. However, not all home loans offer redraw facilities, and fees and terms can vary between lenders. Some may have minimum redraw amounts or limits on the number of redraws you can make per year.

How Is It Different from an Offset Account?

While both redraw facilities and offset accounts can help reduce the interest you pay on your home loan, they function differently:

Redraw Facility

A redraw facility is essentially part of your home loan. Extra payments reduce your loan balance directly, potentially saving you interest. On the other hand, an offset account doesn’t reduce your loan balance but reduces the interest calculated.

Offset Account

An offset account is a separate savings account linked to your mortgage. The balance in this account is offset against your loan balance when calculating interest. Offset accounts typically offer easier access to funds (like a regular savings account), while redraw facilities may have restrictions.

The Undeniable Benefits of a Redraw Facility

If you’re looking for good reasons to pick a home loan with a redraw facility, here are some of its benefits:

• Interest Savings: With extra repayments, you reduce the principal on which interest is calculated, potentially saving thousands over the life of your loan.
• Financial Flexibility: A home loan redraw facility provides a safety net for unexpected expenses or opportunities without the need for a separate loan.
• Discipline in Saving: Knowing your extra payments reduce your loan balance can motivate you to save more.
• Potential for Faster Loan Repayment: By consistently making extra payments, you could pay off your mortgage years earlier.

The Potential Downsides of a Redraw Facility

While most home loan redraw facilities offer undeniable benefits, it’s still important to consider potential drawbacks before making a decision:

• Reduced Accessibility: Some lenders may have minimum amounts or restrictions on redrawing amounts or frequency.
• Temptation to Overspend: Easy access to funds might lead to unnecessary withdrawals.
• Potential Fees: While many are free, some lenders charge fees for redrawing transactions.
• Lender Control: In rare cases, lenders might reduce the available redraw amount or block access altogether.

How Much Can You Redraw? 

Typically, the amount you can redraw depends on how much you’ve paid above your minimum repayments. Most lenders allow you to redraw up to the total amount of your extra repayments minus any minimum balance requirements.

As for fees, while many lenders offer fee-free redraws, you should still check the fine print. Some potential fees to watch out for include:

• Redraw activation fees
• Per-transaction redraw fees
• Annual redraw facility fees
• Minimum redraw amount requirements

Always ask your lender for a complete fee schedule related to the redraw facility to avoid any surprises.

Does a Redraw Facility Work on a Fixed-Rate Home Loan?

Redraw facilities are typically associated with a variable-rate home loan structure. However, some lenders do offer redraw facilities on fixed-rate loans, albeit with more restrictions. These may include:

• Limited or no redraws during the fixed-rate period
• Higher fees for redraws on fixed-rate loans
• Lower redraw limits compared to variable-rate loans

If you’re on a fixed-rate loan and need access to funds, it’s best to check with your lender about your specific options. Some lenders may allow you to switch to a variable-rate loan to have redraw facilities, but this could incur break costs.

How to Compare Different Home Loan Redraw Facilities

When shopping for a home loan with a redraw facility, ask the following questions to see if you’re getting a feature that works to your advantage: 

1. Are there any costs associated with making a redraw?
2. How easily can you redraw on your home loan? Can you redraw it online, or do you need to visit a branch?
3. Are there restrictions on how much you can redraw at once or in total?
4. Is there a limit on how often you can make redraws in a year?
5. How quickly can you access your funds once you request a redraw?
6. Does the loan offer other useful features like an offset account or the ability to make extra repayments without penalties?

Best Practices for Using a Mortgage Redraw Facility Effectively

A redraw facility is an incredible feature, but you must use it effectively to make the most of it. Here are some best practices you can try:

• Make extra repayments regularly. The more you pay above your minimum repayments, the more you’ll have available to redraw if needed.
• Treat it as an emergency fund. Consider your redraw facility as a fund for urgent or unexpected expenses rather than a regular spending account.
• Be strategic with redraws. Only redraw when absolutely necessary. Remember that every time you redraw, you’re essentially reborrowing money and potentially extending your loan term.
• Keep track of your available redraw balance. Check your redraw balance regularly so you know how much is available if you need it.
• Review your redraw terms regularly. Lenders may change their redraw policies, so it’s wise to stay informed about your current terms and conditions.
• Compare with offset accounts. An offset account might be more suitable for some borrowers. Compare offset accounts & redraw facilities’ features and benefits to decide what’s best for your situation.

Let Us Help You Explore Home Loans & Redraw Facilities

A redraw facility can be a powerful tool in your home loan arsenal, offering the benefits of making extra repayments and the security of accessible funds. By understanding how it works and comparing your options carefully, you can make the most of this feature and save thousands of dollars on your home loan journey. Contact us now if you’re ready to explore different home loans with redraw facilities. Our seasoned mortgage brokers are here to help you compare your options to find the perfect loan & redraw facility (and other mortgage features!) for your needs.