When paying off your home loan, it’s handy to know there are features that give you a bit of wiggle room—like a redraw facility. But what’s that, you ask? Let me break it down for you.
A redraw facility is a home loan feature that allows you to withdraw any extra repayments you’ve made on your loan. If you’ve paid more than the required minimum repayments, this extra money can be “redrawn” and accessed whenever you need it.
How Does a Redraw Facility Work?
Let’s say your monthly mortgage repayment is $2,000, but one month you decide to pay $2,500 instead. That extra $500 is now available to you within the loan, available to you to redraw. If you keep making additional repayments, you can build up a pool of funds that you can tap into later on. Think of it as a way to save while reducing your home loan interest at the same time.
The best part is that while this extra money is sitting in your loan, it’s reducing the interest you’re charged, which means you’ll be paying your loan off quicker. So not only does a redraw facility give you access to funds when you need them, but it can also help you pay less in interest over the life of your loan.
How Can You Use the Funds?
The money in your redraw facility is yours to use as you see fit. Whether it’s for a home renovation, a holiday, covering unexpected expenses, or even helping out with school fees, you can access these funds whenever you want. However, each lender has their own rules around how much you can redraw and how often, so it’s important to check these details with your lender.
Is a Redraw Facility the Same as an Offset Account?
Redraw and offset have one thing in common – they reduce the amount of interest you get charged. If, for example, you have $500,000 outstanding on your loan and $40,000 in either redraw or offset, you’ll be charged interest on only $460,000 (i.e. $500k minus $40k).
But there are subtle differences between the two features.
Redraw is a facility that sits within your loan. The way you accumulate money in redraw is by making extra home loan repayments. The lender will allow you to borrow back (or redraw) these extra repayments. However, because this money belongs to the lender, it’s technically possible the lender might decide one day not to allow you to redraw the money or change the conditions of redraw.
Offset however, is a separate transaction account (kinda like an “everyday spending” account) that’s linked to (but separate from) your home loan account. This means you’ll see 2 accounts on your internet banking. The loan account, and a separate offset account. The way you accumulate money in offset is through deposits – for example, salary payments, tax refunds or savings. The money in your offset belongs to you, so the lender can’t prevent you accessing it.
An offset account is also preferred if you have a combination of tax-deductible and non-deductible loans… just ask your accountant!
- Pros: you can use redraw and offset to reduce your interest costs and pay off your home loan sooner.
- Cons: your lender may charge you a higher ongoing fee or higher interest rate to access these loan features.
Is a Redraw Facility Right for You?
If you’re disciplined with your repayments and like the idea of a financial safety net and saving on interest, a redraw facility might just be your jam.
But hold up—don’t forget to check if it’s the best fit for your situation. Maybe an offset account ticks more boxes? It’s all about what works for you.
Not sure which way to go? No stress—we’re here to help you figure it out.
Give us a call on 02 6188 4555 or make an appointment for a free consultation. Let’s chat, and find the perfect home loan solution for you.
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