May the flexibility of a redraw facility be worth considering as you manage your debts, savings and finances? We explain:
What is a redraw facility?
A redraw facility gives access to any extra repayments you may have made on certain types of loans. Commonly, these are home loans and personal loans, with account-holders able to withdraw some of the money already contributed as loan payments. The balance in a redraw facility consists of extra payments made towards paying off a loan, on top of their bank’s minimum repayments.
What are some potential benefits of a redraw facility?
Depending on your circumstances, there may be benefits to using a redraw facility:
- 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 of savings accounts, you could save more money in interest by paying extra into your home loan – with the ability to redraw it again if needed – than you would earn if you kept the same funds in a savings account.
- Lower long-term costs. Depending on your situation and how you use the redraw facility, you may pay less interest on your mortgage long-term.
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 to using a redraw facility:
- Fees. Some lenders may charge a fee for each redraw you seek to make. This is generally more common with withdrawals made in a branch, as opposed to online.
- Withdrawal restrictions. Limits might apply to how many redraws you can perform each year, or to how much money you can redraw at once. 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 this could potentially help you save money in the long run.
- Ease of use. Despite withdrawal restrictions, some home owners might still find it too convenient having access to use a redraw facility. By withdrawing extra payments against your loan, you may reduce your long-term savings achieved.
- Redraw terms could change. If your bank changes the terms and conditions on your loan, you could lose access to your funds, or be forced to withdraw them and find an alternative at short notice. A home loan offset account may be another option to consider if you would like to save on home loan interest but avoid the potential for your savings to be absorbed into the loan.
Before applying for a loan with a redraw facility, it could be worth checking with your lender to confirm the details of any restrictions, fees or other important terms and conditions that may apply to it.
Are you considering a home loan?
If you’re currently considering a home loan, the comparison table below displays some of the variable rate home loans on our database with links to lenders’ websites that are available for first home buyers. This table is sorted by Star Rating (highest to lowest), followed by comparison rate (lowest-highest). Products shown are principal and interest home loans available for a loan amount of $350,000 in NSW with an LVR of 80% of the property value.
Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products.
*Comparison rate based on loan amount of $150,000 and a term of 25 years. Read the Comparison Rate Warning.
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