Understanding the Home Loan Redraw Facility
A redraw facility is commonly on offer with variable home loans. However, grasping the concept can be tricky if mortgages are unchartered territory for you.
In short, having a redraw facility on your home loan could help you take years off your loan term, without tying up your savings.
In this article we will cover the basics of the home loan redraw facility, from how it works, to how it could benefit you.
What Is A Home Loan Redraw Facility?
Having a redraw option with your home loan allows you to withdraw any extra payments you have made on your mortgage as funds from your loan account.
Any repayments made over and above your minimum monthly repayment, would increase the available balance within your home loan. Extra deposits can be made via either manual lump sum or scheduled recurring payments.
Excess funds that remain in your home loan account reduce you total borrowed amount, thus reducing the lifetime of your loan, and the interest amount paid.
What Are the Benefits of a Redraw Facility?
There are a few potential benefits associated with having a redraw feature with your home loan.
As with all home loan products, specifically their features, the terms and conditions can vary from product to product. However, below you can find a list of the common advantages associated with having a redraw facility:
1. Minimised Interest
When used correctly, a redraw facility can be an effective way to reduce the amount of interest you pay on your home loan.
Typically interest on a home loan is calculated daily, and therefore, every day that you have additional funds to redraw, you are paying less interest. When you redraw these funds, the balance on your home loan will increase.
Does this mean you’re undoing the benefit of the extra repayments? Technically speaking, not entirely, as you would have still saved on the interest component for the duration the extra funds were in the home loan account.
A home loan with a redraw facility can be an excellent savings tool.
Although your savings account earns interest, when considering the interest you could save on your home loan by effectively using it as a savings account, the benefits become clear.
Typically, the interest you could save by using your redraw facility, would be greater than the interest you could earn on a standard savings account.
Another, often overlooked, benefit of having a redraw facility is the taxation advantage.
Earnings made on a cash investment, i.e. a savings account or term deposit, are considered as income and will be taxed at the marginal rate. However, any interest that you save on your home loan, through having a redraw account, is not subject to tax.
Additional Things to Consider
There are a few additional things to consider regarding redraw facilities.
- Any fees associated with having the redraw facility
- Withdrawal fees
- Withdrawal limits
As the terms and conditions associated with different home loan redraw features vary so significantly, it’s important to obtain a proper grasp of the advantages and disadvantages of each lender’s home loan products. Your mortgage broker can help you with this.