What is a home loan redraw facility?

During economic uncertainty, finding sources of cash can quickly become a priority. Understanding more about redrawing from your home loan may help. Canstar explains.

With home loan redraw facilities in the news recently, you might be wondering what this home loan product feature is, and if it’s right for you.

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 required minimum repayments.

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.
  • Compound interest. You may earn compound interest on your repayments. With interest charged on your home loan likely to be higher than interest from a cash savings account, more interest may be earned overall.
  • Long-term savings. Depending on your situation and how you use the redraw facility, you may pay less interest on your mortgage long-term.

Potential drawbacks

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.
  • 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.

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 $350K 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

Learn more about Home Loans

Originally written by James Hurwood

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