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What is a redraw facility?
When shopping for a home loan, one of the decisions you’ll make is what kind of features are important to you. A redraw facility is one feature worth considering, but like many features, not all home loans will offer it.
A redraw facility is a home loan feature that allows you to access extra principal repayments you’ve made on your home loan.
If, for instance, you pay $300 a month on top of your minimum monthly principal and interest repayment, you’ll have $3600 in your redraw facility by the end of the year. Down the track, if for any reason you need to access this money, the facility gives you the ability to “redraw” it.
This also applies to any extra lump sum payment made in addition to your required home loan repayments.
Your lender will take into account the money in your redraw facility and calculate interest on the principal amount minus the money in your redraw. So, for example, if you owe $200,000 on your mortgage but you’ve built up $20,000 in your redraw facility, you’ll only be charged interest on $180,000. This could potentially save you thousands of dollars over the life of the loan.
As with every financial decision you make, it’s important to weigh up the pros and cons before deciding whether a redraw facility could be beneficial to you.
Some of the potential benefits of choosing a home loan with a redraw facility include:
- Paying less in interest charges by making extra repayments and keeping them in your redraw facility.
- Paying off your mortgage faster as a result of reducing the amount of interest you pay.
- Having access to your extra repayments if you find yourself in need of extra cash.
On the other hand, some of the potential drawbacks of opting for a redraw facility include:
- Being charged fees by some lenders each time you redraw funds.
- Having the temptation to redraw your extra repayments which could mean losing out on any long-term savings you could have made.
- Limiting your home loan options, as many fixed rate home loans may not offer a redraw facility, or may require you to wait until after the fixed period to redraw.
To learn more about choosing a home loan with a redraw facility, and to compare your options, consider visiting RateCity’s home loan redraw hub.
Disclaimer
This article is over two years old, last updated on November 29, 2009. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent home loans articles.
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