A redraw facility can be a complicated concept to wrap your head around, but may also be invaluable in cutting years off the life of your home loan without locking up all of your savings.
What is a redraw facility?
Redraw facilities are a feature attached to loans (namely home loans and personal loans) whereby account-holders can withdraw money they’ve already contributed to pay off their loan. The balance of this facility consists of whatever extra payments the borrower has already made towards paying off their loan, on top of their usual regular monthly repayments.
The benefits of a redraw facility
The major selling point of redraw facilities is the compound interest earned on your repayments. Because the interest you are being charged on your home loan is likely to be higher than the interest rate you are able to achieve on any cash savings account, it’s a good deal.
The amount owing on the life of her mortgage has been reduced thanks to the four and a half months excess savings in her account. She has the extra money to pay her credit card debt plus the benefit of the $3,500 left in her redraw account for future growth.
Many loan holders will find – if they’re disciplined with their money – a redraw account goes a long way towards paying off a loan while still providing a contingency to pay off future debts. No matter what the money is spent on eventually, you can rest easy in the knowledge that the amount owing on your loan was reduced while you had that extra money in your account.
You should also be aware of the tax advantages of using this facility, because while any interest earned on a cash investment will be taxed at your marginal tax rate, any interest that you save on your home loan by holding money in a redraw facility will not be subject to tax.
If you are seeking further information regarding these redraw facilities, we have provided two comparison tables below that contain low rate home loan providers who allow this feature with links directly to their website. These have been sorted by comparison rate (lowest to highest). Please note that this table features products that are based on a loan amount of $350,000 with a LVR of 80%, under a buying next home profile in NSW.
Variable Home Loans Featuring Redraw Facilities
3 Years Fixed Home Loans Featuring Redraw Facilities
The disadvantages of redraw facilities
While the advantages are significant, you should be aware that there can be disadvantages: fees and withdrawal restrictions tied to each redraw that you want to make, as well as limits pertaining to how many redraws you can perform per year. As such, the money that you pay into a redraw facility ideally shouldn’t be money that you’ll need to use a few weeks later!
Making it more difficult to redraw funds on a regular basis, however, may not be such a bad thing, as this effectively deters you from redrawing too often and saves you money in the long run.
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