What is a redraw facility? How to save on your home loan

These days, most Aussie home loan products offer a redraw facility – a feature that can help you save interest and pay off your mortgage faster. So it's worth getting your head around how they work. 

What is a redraw facility?

Redraw facility

A redraw facility allows you to access any extra payments you have made on your mortgage.

Paying more than the minimum each month directly reduces the principal balance owed, thereby reducing how much interest you're charged the following month, and so on and so forth. Most lenders allow borrowers to make extra payments, but if your loan comes with a redraw facility, you can 'redraw' it back out again if and when you need to.

See also: Offset account vs redraw facility

How much could you save with a redraw facility?

A redraw can provide reassurance for people who are apprehensive about whether they can afford to overpay on their home loan, and allow them to benefit from a reduced interest bill. Even small overpayments can quickly add up to major savings on your total interest bill.

Imagine you borrow $500,000 at 5.00% p.a. interest rate over 30 years.

This is how regular overpayments could reduce your total interest bill, as per our home loan repayment calculator.

Extra monthly payment	Life of loan savings	Total interest	Time to pay off mortgage
$0	$0	$466,279	30 years
$10	$4,686	$461,593	29 years, 10 months
$100	$42,599	$423,680	27 years, 10 months
$1,000	$227,738	$238,541	17 years, 4 months

Can a redraw facility reduce the size of your repayments?

While paying extra and building up your redraw facility can reduce the total amount of interest you pay, it won’t necessarily change the size of your regular repayments.

Any extra repayments you make will go toward reducing your loan’s principal balance, and a redraw facility allows you to access those additional payments if you need. Your regular repayment will remain the same, but more of each payment will go toward the principal rather than interest. This could see you paying off the loan faster.

Though, if the balance of your redraw facility is significant, you might be able to negotiate with your lender to reduce the size of your regular repayments.

How a redraw facility can help you pay off your mortgage faster

A major benefit of overpaying on your home loan is the potential to pay it off faster, since overpayments go towards paying down the principal.

Returning to the above example, if you borrowed $500,000 over 30 years with a 5% interest rate, your repayments would be around $2,685 a month.

If you paid $200 extra every month, you’d be mortgage-free in around 26 years and pay nearly less in $77,000 interest, but your minimum monthly repayment would stay at $2, 685.

Putting $1,000 extra into that same loan each month would see the loan paid off in 17 years.

Can you make home loan repayments directly from your redraw balance?

If you’re ahead on your home loan and have built up extra funds in your redraw facility, you might be able to use that balance to cover your monthly repayments. This could allow you to take a repayment holiday – essentially pausing your regular payments by drawing from your available redraw balance instead of out of pocket.

Not all lenders offer this option, however. You’ll likely need to contact your lender directly to confirm your eligibility.

See also: 3 crucial things to know before you defer your home loan payments

Redraw facility: Red flags to look for

Extra fees and higher rates

While a redraw facility is commonly free to use, some lenders charge borrowers when they withdraw their extra repayments.

It's also worth nothing that home loans with redraw facilities might charge higher rates, as well as more fees, than those without. Most mortgages come with redraw facilities these days, however.

Redraw conditions

Unlike offset accounts, accessing the money in a redraw isn't as simple as swiping your card or shifting it into another account. You might need to make a redraw request and wait for it to be processed, or there might also be limitations on how often redraw can be used. There may also be limitations on the minimum and maximum amount that can be redrawn.

It's worth asking your lender whether there are any conditions to the use of its redraw facility.

How to compare home loans with redraw facilities

As the terms and conditions of redraw facilities differ significantly among lenders, it is important to understand what's on offer before you take out the loan.

It's important that you answer these questions before signing on the dotted line:

1. Is there a fee for having or using a redraw facility

Some mortgages demand a person pays a flat fee for having a redraw facility. Sometimes this won't be charged until the redraw facility is activated.

Other lenders might demand a borrower pays a fee each time they withdraw funds using their redraw facility. This fee can vary significantly between lenders, and many don't charge one at all.

2. Is there a maximum number of redraws or free redraws per year?

Some redraw facilities grant the borrower unlimited free redraws while some lenders offer a number of free redraws per year. Other lenders might limit the number of times a borrower can use their redraw within a set period.

3. Is there a minimum amount you can redraw?

Lenders often instate a minimum amount that can be withdrawn at once using a redraw facility. Whether this exists and how much is it determines the true flexibility of a redraw facility.

4. Is there a maximum redraw amount?

Other times, a lender might have set a maximum amount that a homeowner can redraw in one go. This might be the total amount of additional repayments, less one month's repayments, or the total value of additional repayments you have made.

Is a redraw facility right for you?

Although making extra repayments and having a redraw facility offers many advantages, it will likely only help the right type of borrower. It's important to determine whether a redraw facility will suit your financial circumstances and your personal approach.

There's little point paying for something you're not going to use, so if it's unlikely you'll be able to make additional repayments on your home loan in the foreseeable future, there isn't much point going out of your way to have a redraw facility.

For those who can afford to make extra repayments though, a redraw can help lower your interest bill and potentially pay off the loan sooner.

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Important Information and Comparison Rate Warning

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