Redraw explained

23.11.21 | Marc Barlow | Resources

Redraw explained

How access to cash can save you money

Home loans come in many shapes and sizes, from simple low-interest loans, to fully-featured loans that offer more choice to borrowers.

One of the most common options you have when taking out a home loan is a redraw facility. Here’s what it is, and why it’s worth considering.

The low-down on redraw

The redraw concept is simple: While you’re paying off your home loan, you can make extra payments, on top of the minimum repayment amount. Later on, if you need extra money for any reason, you can get access to any extra amount you’ve already paid.

Redraws are especially common on variable-rate loans, with only a small number of lenders offering it on fixed-rate loans. They’re also usually confined to loans for new homes, rather than additional loans for renovations or other construction.

Start with extra payments

The first step in making redraw work is to make extra payments. Even without redraw, the more you pay into your loan, the faster you’ll pay it off, and the less interest you’ll pay.

Some people drop one-off amounts into their loan, such as tax refunds or inheritances, while others just add $50 or $100 to their regular repayments. Whatever works for you — and every little bit helps. On an $800,000 typical variable loan, for example, just $50 extra per month into redraw over the life of the loan will take about a year off your loan and save you more than $12,000 in interest. Pretty amazing.

Redraw’s big benefit

Unlike extra payments made on loans with no redraw, though, the real beauty of the redraw is that you have access to any additional payments you make; the money isn’t locked away for the life of the loan. So if things get a bit tight financially, or you just want a holiday to Hawaii, or suddenly need a new car, you can dip into your redraw amount.

Access to your redraw facility

Different lenders have different rules, but – generally speaking – access to redraw is simple, and you can have your money immediately. Some lenders even allow you to withdraw your money from an ATM, while others require you to transfer between accounts, which you can usually do online.

Keep in mind that some lenders have limits, such as only allowing one redraw per year, and some might have a fee to use the service, so if you think you might like to use redraw at some point, check out the rules first.

And remember that if you do redraw money out of your loan, your loan amount will increase accordingly, meaning that the interest component of your repayments will increase too. Leaving your extra payments alone and adding to them bit by bit is the best option. Pay your loan off faster and save on interest at the same time.

Talk to us

To learn more about the benefits of redraw, and to hear examples of how redraw has benefitted people in the past, contact us at Mortgage Broker Melbourne. If you decide that you’d like a loan with a redraw facility, we will show you some options and help you select a loan that best suits your needs.