If you’re conscious that your cash flow sometimes requires a top up, whether for business or personal reasons, you might consider a loan with a redraw facility.
What is a redraw facility?
A redraw facility is the ability to borrow funds that you have already repaid. You’ll often spot this as a feature of variable rate loans. You can also be flexible about how you pay down your loan, for example using funds in a savings account to pay off some of the loan. If you have made extra repayments a redraw facility can allow you to claw back the extra amount in certain circumstances.
Why do people use a redraw facility?
There are a number of reasons why you might want to use a redraw facility:
- You might like the idea of having an emergency fund at your disposal in case you incur unexpected expenditure, such as car repairs, urgent home refurbishment or medical bills;
- If you can afford to make extra payments at least a few times every year this would make it easier to manage your funds;
- Your extra payments will reduce the amount of debt you have and this in turn will reduce the interest you’re paying.
What are the main features?
Your redraw facility brings benefits because any extra payments made offset the capital or principal you have borrowed. The amount you pay in interest will therefore be reduced so you would benefit from repaying your loan more quickly; however, your lender may set limits on how much you can overpay and redraw. If you manage your redraw facility well you can use your home loan or mortgage like a transaction or everyday account.
You may be able to pinpoint redraw facilities available for basic home loans and package home loans. Some interest only home loans also offer a redraw feature, as do some specialty home loans.
What are the pros and cons of redraw facilities?
With redraw facilities you can make extra loan repayments when it suits you and then take extra funds when you need them. This is very useful in emergency situations or in other circumstances when you incur unforeseen expenses. A redraw facility also gives you peace of mind, as you know that you can continue to reduce the loan amount while you still have access to additional cash in your account.
Bear in mind that some redraw facilities come with additional fees for withdrawing and depositing money. Lenders might charge these fees immediately or offer a specific number of free overpayments and redraws per month. In some cases redraw facilities may be limited to minimum amounts and lenders can also put limits on how frequently you use redraw facilities. This can make it difficult to redraw funds regularly.
Finally, if you choose to settle the loan in its entirety before the fixed term ends, with fixed rate home loans you may discover there are high exit fees, also known as break costs.
Always check the terms and conditions of your loan contract for specific information about redraw restrictions.