Compare home loans with redraw facility

A redraw facility is a feature of some home loans that allows you to access extra principal repayments you’ve made on your home loan.

For example, if you pay $200 a month more than your minimum monthly repayment covering principal and interest, then at the end of the year, you will have $2400 sitting in your redraw facility. Any lump sum payment made in addition to your required home loan repayments also goes into your home loan redraw.

The facility allows you to take back or “redraw” this money down the track.

Lenders take into account the money in your redraw facility and calculate interest on the principal amount minus the money in your redraw, potentially saving you thousands of dollars over the life of the loan.

Redraw is a feature of your home loan; offset is a separate transaction account attached to your home loan. Although both work to reduce the amount of interest you pay on your loan, they operate quite differently.

While redraw comes from making additional payments to your home loan above the minimum required payments, an offset account operates like an everyday transaction account. You can have your salary paid into it, use it to withdraw cash from an ATM and have a debit card linked to it while any money sitting in the account reduces or “offsets” the amount of interest you pay.

A redraw does not come with the same flexibilities as an offset. You may be limited by minimum and maximum redraw amounts and there could be fees attached. It could also take time to access your money in a redraw facility. An offset account gives you immediate access to your funds.

Offset accounts are usually part of a home loan package that also comes with a debit or credit card. You could be hit with a monthly account fee or a higher interest rate to have the offset account so you want to weigh up the different loan products and ensure the savings you make outweigh the costs.

A savings account earns you interest on the money you have in your account while a redraw reduces the amount of interest you have to pay on your loan.

However, Australia’s record low interest rates right now mean you’re unlikely to see your wealth grow by parking any additional money you have in a savings account.

You may find that increasing your repayment amount and having that extra money sitting in a redraw facility could offer you greater value.

Consider this scenario: You inherit $50,000 five years into your 30-year $500,000 home loan. If you put that $50,000 into a savings account earning 0.1 per cent interest, you would only earn $50 in one year. You’ll also potentially need to pay tax on that. If you put that $50,000 as an additional lump sum off your mortgage paying the average RBA variable rate of 3.03 per cent interest and have it in a redraw facility, you would save around $1500 in interest in the same year – 30 times the interest you would earn in the savings account.

This all depends on the lender. Some fixed rate home loans allow you to make limited additional repayments of $10,000 or $20,000 a year. However, some will not allow you to access this money while the loan is fixed. At the end of the fixed term when the loan reverts to a variable rate, you can redraw that money. Fixed loans don’t tend to have the same flexible features as variable rate home loans.

Redrawing your extra repayments should make no impact on your credit score. While your additional repayments may reduce your home loan term by a year or two, redrawing the funds will simply see your loan revert to its original term.

Your credit score is much more likely to be affected by making multiple home loan applications. If you apply with multiple lenders in addition to applying for other types of credit such as a credit card, the number of enquiries can damage your credit score.

A redraw facility is a feature of a home loan that gives you access to any extra payments you’ve made on the principal portion of your home loan.

Making extra payments and having them in the redraw facility reduces the amount of interest you need to pay on the loan. For example, if your home loan is for $400,000 and you have made extra repayments of $20,000 that is sitting in the redraw facility, interest is calculated on $380,000. The less interest you're charged, the faster you can potentially pay off your loan, and the more time and money you may save over the long term.

If you fancy a holiday or need a bathroom renovation, your available redraw is $20,000 and you can access that money through online banking, over the phone or in person at a branch. However, there may be fees involved.

There may also be limits on how much you can redraw and how often.

You can only withdraw your redraw balance, that is the amount you have paid above your regular repayments. Some lenders will allow you to redraw the full amount minus one month’s scheduled repayment.

Redraw amounts may be limited by minimum and maximum requirements and there may be caps on the number of redraws you can make.

NAB for example has a minimum redraw of $500 and a maximum of $150,000 a day.

Redraw fees are money you pay your lender to access the redraw facility on your home loan.

You could be hit with a one-off redraw activation fee to activate the feature on your loan, as well as a fee for each redraw you make. Your lender may offer a set number of free redraws per year then charge a fee once that limit has been reached.

If you refinance for a larger loan amount, any extra repayments you have made on your previous loan may form part of the equity on your new loan. Depending on the size of it, your loan to value ratio (LVR) may be affected. If the bigger loan means your LVR is now above 80 per cent, you may have to pay Lenders Mortgage Insurance (LMI).

On the other hand, if you are refinancing for a better rate and not increasing the loan size, the money you had in redraw could reduce your LVR and give you access to an even cheaper interest rate. But once it’s considered part of your equity, you may not be able to access it so easily.