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Home loan redraw pros and cons
At times of financial stress or emergency, you might try to borrow money from your friends or relatives or apply for a high-interest loan. Borrowing money from people you know can hamper your relationships. And if you choose to take out a high-interest loan, it may cause further financial hardship. There may be another option that lets you borrow cash from any extra payments you’ve made towards your home loan. This is known as the redraw facility.
What is a home loan redraw facility?
A home loan redraw facility allows you to withdraw any additional payments you have made on your home loan. By making extra payments on your home loan, you could lower the outstanding principal, reducing the interest charged on your loan. Paying extra on top of your scheduled repayments can also help you close the loan earlier.
With a redraw facility, you can take out the additional funds you paid into your mortgage and use them for another purpose. However, remember that you can only redraw the extra repayments you’ve made – it's not possible to redraw your monthly repayments.
Some lenders may have limits around how much money you can redraw or the number of times you can redraw per year. Some may also charge you a fee for accessing the redraw facility. Furthermore, a redraw facility may not be available to you if you’re on a fixed rate home loan.
How does a home loan redraw work?
A redraw facility allows you to access any extra funds you’ve paid into your mortgage, if needed. For example, if you pay an extra $100 a month on top of your minimum monthly repayment, you’ll have $1,200 available in your redraw facility by the end of the year that you could ‘redraw’ for other purposes.
While this sounds straightforward, there are a couple of important things to understand with respect to a redraw facility.
- How can you build your home loan redraw fund?
- How much money can you redraw?
How to build your home loan redraw fund?
A redraw facility is only available when you’ve made additional repayments into your mortgage above the minimum repayment amount. That extra amount will be deducted from your mortgage, save you interest, and be accessible via redraw. Some may call this extra amount sitting in your home loan the redraw fund.
Before you start depositing more money with the hopes of redrawing it later, check with your lender about their redraw policy. There are a couple of easy ways to build up your redraw funds:
- Make lump sum deposits towards your home loan whenever you have an excess amount available with you. Windfall gains like inheritance, salary bonuses, and tax refunds can be great ways to increase your redraw funds.
- Another method is to regularly repay more than the minimum repayment amount. This will allow you to increase your redraw fund gradually.
How much money can you redraw from your home loan?
A redraw facility gives you access to the extra payments you made into your loan, also known as your redraw fund or balance. With some lenders, you can withdraw your entire redraw balance minus a month’s scheduled repayment. Others may have minimum and maximum redraw requirements in place, such as an 80% cap on the value you can access, or there may be a limit on the number of redraws you can make.
The amount of your redraw balance you can access at any time is also called the available redraw. Remember to contact your lender and read the fine print to ensure you’re aware of any special conditions.
If you plan to use a redraw facility to save money in interest charges, you should also check how the lender calculates your available redraw over the life of the loan.
Some lenders may reduce the available redraw on your home loan over time so that both your loan balance and available redraw reduce to zero by the end of the loan term. If you see your monthly repayments drop as a result of making additional repayments on your loan, your lender has probably used a part of your redraw balance to adjust your repayments. While this may seem lucrative, as your repayment size could reduce, you’ll not gain much in terms of saving interest on your loan or closing it early.
Sally Tindall, head of research for RateCity, says: “If you’ve got extra money stashed in your home loan in a bid to pay off your loan early, make sure your bank does not lower your monthly repayments, as this will counteract your efforts.”
She adds that “redraw facilities can seem straightforward, but many borrowers don’t read the terms and conditions of their redraw facility and can get tripped up by the consequences of moving money in and out of a loan.”
How to redraw on a home loan?
- Contact your lender: You could do this online, over the phone, or in person at a branch.
- Apply for a redraw: You may need to place a redraw request by filling out a form online or in person.
- Receive the funds: You’ll receive the funds in your nominated account either instantly or within a few business days of applying for a redraw.
What are the pros and cons of using a home loan redraw?
Benefits
- Interest savings: A redraw facility will encourage you to make higher repayments toward your home loan. These higher repayments will reduce your principal amount, which means the interest charged will be calculated on a lower amount. You may save more money by paying less interest in the long run.
- May be better than other debt options: Repaying more to your home loan may reduce your interest, but the interest costs will go back up when you redraw these funds. But even this interest increase may be comparatively cheaper than other borrowing facilities like credit cards and personal loans.
- Accessibility: A redraw facility can usually be easily accessed. Some banks even allow you to withdraw money online using your internet banking or a mobile app.
- Tax saving: If you choose to put additional money into a savings account to build up an emergency fund, you’ll pay tax on any interest earnt. But if you choose to put that money into your home loan to act as a redraw facility, you won’t have to pay extra tax on that money.
Drawbacks
- Redraw fees: Some banks will charge you a fee every time you wish to redraw funds from your home loan. Redraw fees are more common when you use the facility in a bank branch, and the fees may be different if you use an online option. There are also some lenders that offer this facility free of cost for a fixed number of redraws.
- Withdrawal restriction: Some lenders also restrict the total amount that you can withdraw at any given time. This could be a problem if your emergency need for money is above this amount.
- Repayment restrictions: The lenders that offer access to redraw funds might also restrict the total amount of extra repayments that you can make in a year. This reduces the amount that you can redraw each year and prevents you from decreasing your total interest amount.
- Sudden change in policy terms: Lenders have the power to change the terms and conditions of their products as they please. This means a sudden change in terms could cause you to lose access to your entire redraw fund. Therefore, you should discuss the policy terms of the redraw facility with your lender every time you make an extra repayment or at least on a regular basis in case of changes.
- Availability: Redraw facilities are more likely to be available for home loans with a variable interest rate.
What are the alternatives to using a home loan redraw facility?
Making extra payments on your home loan could help you increase the equity in your property. When you redraw these additional funds, it could decrease your equity. Alternatively, you may have the option to leverage your equity to meet other expenses.
For instance, you could use your home equity as security for a personal loan, which may help you qualify for a lower rate than an unsecured personal loan. It’s also possible to borrow against your equity through refinancing. You may have the option to borrow a lump sum or open a line of credit. However, remember that drawing upon the equity in your house could lead to longer loan tenure, which may increase the cost of the loan to you.
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Product database updated 21 Nov, 2024
