Redraw Facility
When managing their home loan repayments, clients always seek options that provide financial flexibility and control over their finances.
A redraw facility is one such feature that can prove beneficial for homeowners. It allows voluntary extra repayments for the mortgage and lets you take out any extra repayments you’ve made should you need them for other purposes.
Opting for a redraw facility is a popular way to pay off the mortgage sooner, but is it a great option?
In this article, we delve into the concept of a redraw facility for home loans, how it works, its advantages, and considerations for borrowers.
What is a redraw facility?
A redraw facility is a feature some lenders offer as part of their home loan products. It allows borrowers to make additional repayments beyond their regular scheduled payments, effectively reducing the outstanding loan balance.
If you have a redraw facility, you can access extra repayments made previously. These are payments on top of the minimum mortgage repayments set by your lender.
The crucial advantage is that it permits extra repayments AND access to these repayments when needed, providing a flexible way to pay off the home loan and earn cost savings.
However, lenders set different terms with redraws. This could range from assigning an app or a card for the funds’ access to setting limits to how much you can access. Lenders discourage re-borrowing (redrawing) an amount higher than a client can reasonably repay within the original loan term (e.g., 30 years). Plus, there may be redrawn fees should you wish to proceed with the transaction.
How does it work?
Let’s say Shane has a loan amount of $400,000 at an interest rate of 5% for 30 years. His monthly repayment is calculated at $2,147.29.
If he makes additional repayments without utilizing redraw facility – say an extra $200 each month – the total monthly repayments become $2,347.29. The extra amount reduces the principal loan of $400,000 faster, which leads to interest savings over the life of the loan.
If Shane utilizes a redraw facility, he makes the same additional monthly repayments of $200 but will enjoy more flexibility.
For instance, let’s assume that after 24 months, Shane faces an unexpected expense of $4,000. He decides to access the accumulated extra repayments from the redraw facility to cover this expense. Over 24 months he has $200 x 24 = $4,800 in extra repayments in the redraw facility.
Shane can withdraw $4,800 from the redraw facility to cover his unexpected expense. This withdrawal does not impact the regular repayment schedule or loan term.
In 25 years, the extra repayments would amount to $200 x 300 = $60,000. However, if at this time he decides to redraw the $60,000, that would shoot up the monthly repayment to about $4,000 with only 5 years remaining, which the lender would deem too high. They will have the discretion as to what amount can be redrawn that would keep the mortgage repayments appropriate and realistic for the remaining loan amount.
Is a redraw facility available in every home loan?
Not all lenders offer this type of feature in their mortgage products. Redraw is typically available on variable home loans and less so on fixed rate loans. After all, fixed rate is indeed that – fixed rate. You are not allowed to make extra repayments in the first place, let alone have the option to redraw these repayments later on.
Our Intellichoice mortgage professionals can search in our network of lenders which home loan product has a redraw facility to make sure you can maximise its advantages.
What are the pros of a redraw facility?
Less interest – Making extra repayments (if your home loan allows it) can lead to interest savings over the loan term. As the outstanding loan balance lessens, the interest charged on your principal amount also decreases.
Flexible access to funds – The ability to access extra repayments provides clients with a safety net during unfortunate times of financial strain. This is especially important for those without an emergency fund.
Tax efficiency – Unlike funds placed in a savings account, extra repayments in a redraw facility are considered part of the home loan, not assessable income. Clients won’t be liable for income tax on those extra repayments.
What about the cons?
While accessing a redraw facility makes your extra repayments potentially more worthwhile, there are also downsides:
Redraw fees and limits – Some lenders impose fees every time you use the redraw facility, and there are minimum and maximum withdrawal amounts.
Lender’s control – When you opt for a redraw, that money essentially belongs to your lender. The bank will be the one to stipulate the terms, which could mean less control for you over your funds.
Repayment schedule – Using a redraw facility may alter the original repayment amount and schedule. This can affect the mortgage term and your interest amount paid over the course of the loan.
Redraw vs. offset account – Some clients prefer an offset account over a redraw facility, because it is relatively harder to access funds in a redraw than in an offset account. With an offset, you open a separate savings account linked to the home loan, in which you can withdraw the funds. The balance offsets the loan principal, reducing the interest payable without affecting the repayment schedule.
What to consider in a redraw facility
Check with your mortgage broker and lender if these key aspects of the redraw are right for you:
Fees: Lenders could assign a flat fee or charge an activation fee when the borrower uses the redraw facility.
Redraw frequency per year: Some redraw facilities have a set number of free redraws and you have to pay once you exceed this number.
Minimum amount: Banks vary in setting the minimum redraw amount – anywhere from $500 to $5,000 depending on your mortgage product.
Maximum amount: Lenders also set a maximum redraw amount which can be accessible regardless of how much extra repayments you make over the life of the loan.
Fixed rate and redraw: Some fixed-rate home loans do have a redraw option. The arrangement is that you can make extra repayments but only up to a certain limit, say, $10,000, during the fixed term of the loan. You can redraw the amount when needed.
Home loans with a redraw facility
A redraw facility is a valuable tool that gives homeowners financial flexibility and the potential to save on interest costs. Borrowers can reduce their outstanding debt and access these extra funds if required by making additional repayments to their home loan.
Of course, there are considerations. When considering a redraw facility, you should be aware of any fees, withdrawal limits, and the impact on their loan term. Discuss your options with our mortgage broker for a more informed decision.
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