What is a redraw facility?
A redraw facility is a home loan feature that lets you access extra repayments you’ve made towards your loan, above your lender’s minimum repayments. Depending on your lender's terms and conditions, you may be able to withdraw some or all of these funds if you need them.
Extra repayments can be worthwhile as interest is generally calculated daily on your outstanding loan balance, and paying more than you need to can reduce this balance, thereby shrinking the amount of interest you pay over the life of your loan. If you have a redraw facility, you don’t need to choose between access to your emergency fund and home loan interest savings.
However, it’s important to note there may be restrictions placed on when and how much you can redraw, and these can differ between lenders.
What’s the difference between a redraw facility and an offset account?
Both a redraw facility and an offset account can help to reduce the amount of interest you pay on your home loan, but they work in different ways.
Redraw facility
A redraw facility lets you take out any extra repayments paid into your home loan. These extra repayments reduce your loan balance and the interest you’re charged. But your lender may apply limits or conditions on when and how you can use your redraw facility.
Offset account
An offset account is a separate transaction account linked to your home loan. Instead of reducing your loan balance, the money in the account is offset against your home loan when interest is calculated. Because your savings remain in a separate account, they can generally be accessed like money in a regular bank account.
Who can use a redraw facility?
Not all home loans include a redraw facility, so if you want to use one, you'll need to apply for a loan that offers the feature. If your loan has a redraw, you'll also need to have made extra repayments in order to access them.
The amount you can redraw will depend on your available redraw balance, as well as your lender's terms and conditions. Some lenders may set minimum redraw amounts, limit how often you can redraw, or place other conditions on accessing your funds.
When could a redraw facility be useful?
A redraw facility might be useful if you plan to make extra repayments on your home loan and want access to those funds later. Reasons borrowers might choose to redraw include:
- Paying for home renovations or repairs
- Covering unexpected emergency expenses
- Replacing or repairing a car
- Helping to pay education or university costs
- Managing large medical or dental bills
Keep in mind that redrawing funds will increase your outstanding loan balance and you could pay more interest over the life of your loan than if redrawn funds had remained in the loan, particularly if you don't continue making extra repayments afterwards.
How to compare home loans with a redraw facility
Looking to compare home loans with a redraw facility? Before you take out a home loan, take some time to look beyond the interest rate.
While the ability to access extra repayments you might make may provide flexibility, the way redraw facilities work can vary between lenders and loan products and it’s important to weigh up these differences. Consider the following:
Interest rate and comparison rate: Compare both to better understand the potential overall cost of the loan you’re looking at.
Redraw fees and access methods: While many lenders allow free redraws, some may charge fees for certain transactions, such as smaller withdrawals or those made in a branch.
Minimum and maximum redraw amounts: Some lenders require a minimum amount to be available before you can redraw or limit how much you can withdraw in a single transaction.
Loan type: Redraw facilities are commonly available on variable rate home loans. Though, some fixed rate loans may also offer redraw facilities.
Extra repayment options: Some lenders allow unlimited additional repayments, while others may limit the amount you can pay ahead. Caps on extra repayments are particularly common on fixed rate home loans.
Additional or extra loan features: Depending on your needs, it could be worthwhile comparing other features too, like offset accounts, flexible repayment options, or the ability to split your loan.
To understand exactly what you’re signing up for when applying for a loan with a redraw facility, it's important to read the loan's terms and conditions before applying.
What are some potential benefits of a redraw facility?
Depending on your circumstances, the benefits of using a redraw facility could include:
- Flexibility: Being able to redraw extra repayments on your home loan may be helpful, particularly in an emergency.
- Interest savings: Because the interest rates on home loans are generally higher than those on savings accounts, you could end up better off saving money in interest by paying extra into your home loan (with the ability to redraw it again if needed) than if you were to keep the funds in a savings account.
- Mortgage-free faster: Making extra repayments can help you pay off your home loan sooner, while a redraw facility gives you the peace of mind that you can still access those funds if needed. Though it’s worth noting, if your home loan is repaid entirely, you won’t be able to redraw prior extra repayments.
What are some potential drawbacks of a redraw facility?
Having a good idea of how you might use a redraw facility is important. Depending on your circumstances, there may be drawbacks too:
- Fees: Some lenders may charge a fee for each redraw you make or for certain redraw requests. This is generally more common with withdrawals made in a branch, as opposed to online.
- Withdrawal restrictions: Limits on how many redraws you can make each year, or to how much money you can redraw at once, may apply. However, making it more difficult to redraw funds on a regular basis may not be such a bad thing if it deters you from redrawing too often, as it could help you save money.
- Redraw terms can change: If your bank changes the terms and conditions on your loan, you could lose access to your funds, or your access could be changed. While unlikely, and banks that have changed redraw rules in the past have faced backlash loud enough to force them to reverse their decision, there is a risk this could happen.
- Paying more into your mortgage than you owe could see your loan closed: If you make more in extra repayments than you owe on your home loan, your lender might close your loan facility. If it does, you likely won’t be able to redraw the extra funds you’ve paid anymore, as the loan won’t exist. If you’re worried about this, you might consider funnelling funds into an offset account instead.
Before applying for a loan with a redraw facility, check with your lender to understand any restrictions, fees or other important terms and conditions.
What is the best redraw home loan?
There isn't one ‘best’ redraw home loan for every borrower. The right option for you will depend on your financial circumstances, goals, and how you want to use the redraw facility. For some, the ability to make unlimited additional repayments and fee-free online redraws might be best. For others, selecting the right mortgage could be more about finding a competitive interest rate.
When comparing redraw home loans, a good place to start might be looking at:
- A loan’s interest rate and comparison rate
- Redraw fees and transaction limits
- Minimum redraw amounts
- How easily you can access your available funds
- Whether the loan offers other flexible features, such as an offset account
- Any ongoing or annual fees.
Comparing a range of home loans and their features can help you find one suited to your needs, rather than choosing based on a redraw facility alone.
