21 Feb 2009

What is a home loan redraw facility?

A redraw facility might be the perfect option when choosing the right home loan for you. Redraw facilities are a functional tool for Australians who want to access extra savings they made over the years and use these funds to pay off their loan. The main aim of a redraw facility is for applicants to reduce the interest paid on their loan.

Unlike offset accounts, which take the function of standard transactions, redraw facilities allow applicants to access extra payments made over the years as a loan saving.

A look into redraw facilities

In essence, a redraw facility is a home loan feature that allows borrowers to make additional repayments into their home loan, above and beyond their standard monthly and fortnightly repayment. In other words, Australian borrowers can maintain a steady redraw balance and withdraw the extra money they've added into their home loan if they need it.

How does a redraw facility work?

A redraw facility allows Australian borrowers to reduce their balance quicker by making extra payments on their home loans. These enable borrowers to both pay off their loan sooner as well as reduce the loan interest paid back to the bank.

As redraws are additional repayments over and above your standard repayment, you will be able to redraw this money when needed the most. In most cases, lenders won’t charge you a fee for this, but some redraw facilities operate under their own provided regulations.

When using a redraw, it is important to know that you can only withdraw additional payments that you have made. For example, if your loan is $450,000 and you've saved an additional $50,000, your statement will indicate negative $450,000 and positive $50,000. As the available $50,000 was made in additional repayments, you can withdraw that at any time.

A redraw can also be utilized to make additional regular monthly repayments. These are not necessarily bulk sum repayments. For instance, if your monthly repayment is $800 and you make $1,000 per month, you'll have an extra $200 per month in your redraw.

How can you get a redraw facility on your home loan?

When looking to apply for a loan in Australia, applicants need to let their lender know that they want to use a redraw facility. Potential buyers should take into consideration that some loan products are incompatible with using a redraw facility as a fixed rate.

What are the pros of a redraw facility?

The key perks of using a redraw facility when applying for a loan in Australia are:

● Flexibility

As you've made additional repayments through a redraw facility, the funds will be available to withdraw for many purposes. These include a medical emergency or home renovations. All in all, a redraw facility provides total flexibility for borrowers who want instant access to their extra savings.

● Reduce the total amount of interest paid

As redraws enable you to make additional repayments, the loan principal can be reduced. Thus, the interest you are paying back will come at a reduced amount. This is quite suitable for borrowers who managed to save up more cash on the side and want to put it to good use.

● Own a home sooner

The math is pretty simple. If you make extra repayments, you'll pay off your loan faster and will therefore own your home much sooner. Even more, applicants using a redraw facility as a way to own a home faster will have more eligibility in applying for a second mortgage or more liberty in doing other property investments. 

What are the disadvantages of a redraw facility?

When it comes to a redraw facility disadvantages, there are few main drawbacks that Australian borrowers need to keep in mind:

1. There may be a withdrawal fee

Lenders won't allow a redraw facility at a fixed rate. Some may charge applicants a fee for redrawing funds, or might only allow them to redraw funds for free a certain number of times per year before charging them a fee.

2. Some lenders may require a minimum withdrawal amount

Now, while some lenders may charge a fee, others will pose a restriction on the minimum amount that you can redraw at a single take. You need to keep in mind that not all lenders or products offer a redraw facility, so it might be wise to explore your options before making the final call.

3. Change of redraw terms and conditions

The terms and conditions of your loan might be changed by your bank. As such, newly imposed regulations might oblige you to either withdraw the funds or lose access to them altogether. The most simple solution to this issue is to use a home loan offset. A home loan offset will enable you to both save on interest and avoid locked loan savings.

4. How much can I redraw?

Generally, Australian borrowers can access all additional repayments made ahead of their scheduled repayment, except funds made during the most recent month. As an example, let’s discuss extra repayments of $200, made per month. After all 12 months are paid, borrowers will be able to withdraw $2,400, or minus one month’s repayment. However, many home loans are offered with a maximum amount available, so borrowers can redraw all their earnings regardless of the additional repayments made.

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