Many banks and other mortgage lenders will let you make extra repayments onto a home loan. Depositing your extra cash into your mortgage like this can help to lower your loan principal, reducing your interest charges and bringing you closer to exiting the loan early. However, it’s not always easy to take this cash back out of your mortgage again in a hurry, unless your home loan has a redraw facility.
What are extra repayments?
When you successfully apply for a home loan, you agree to pay back the principal you’ve borrowed in regular instalments over time, plus interest charges.
The cost of your mortgage payments will depend on the interest rate charged by your lender, the size of your mortgage principal, the length of your loan term and the frequency of your repayments. Your lender will calculate the cost so that if you keep making the same repayments, you’ll fully pay back your loan plus interest charges by the end of the agreed loan term.
However, many lenders also allow borrowers to pay extra money onto their mortgage. Whether it’s regularly paying a little more than the minimum required amount, or making one-off deposits of lump sums when you have the money available (such as after receiving a tax refund), these extra repayments go straight onto your loan principal. This brings you an extra step closer to paying your loan off early, and can help to reduce the interest you’re charged on your loan.
How can you make extra repayments?
There may be a few different options for making extra repayments, depending on your mortgage lender.
If you regularly pay your mortgage using a direct debit, you may be able to increase the amount beyond the minimum, shrinking your mortgage principal a little more with each repayment. You may also be able to make one-off transfers of money from your bank account onto your mortgage, especially if you bank with your home loan provider.
If you’re wanting to deposit some physical cash into your home loan, you may be able to do so by visiting a branch (if your lender has branches available near you) or through one of your lender’s ATMs.
How can you access your extra repayments?
Once you’ve made extra onto your mortgage, it can be hard to access this money again if you need it, such as when you need to pay for car repairs or unexpected medical bills.
You may be able to use the extra equity in your property to refinance your loan and access a home equity loan or a line of credit. However, this can take time and effort to set up, which isn’t helpful if you need access to your money in a hurry.
A faster way to access the extra repayments you’ve made into your mortgage may be by using your home loan’s redraw facility.
What is a redraw facility and how does it work?
A redraw facility is a home loan feature that allows you to ‘redraw’ extra repayments from a home loan. While you can’t take your previous minimum monthly repayments back out of your home loan, any extra repayments can effectively be withdrawn from the loan, much like withdrawing money from a bank account.
A redraw facility can help make a home loan much more flexible. You’ll have the option to put your savings onto your home loan as extra repayments, thus shrinking your interest charges, but still be able to access this money again in a hurry if you need it. Of course, taking money out of your home loan like this can undo the good work it was doing reducing your interest charges, and it could take a little longer to pay off your loan.
It’s important to remember that not every home loan comes with a redraw facility. For example, fixed rate home loans are generally less likely to offer flexible repayments than their variable rate counterparts. Also, keep in mind that there may be caps or limits on how often you can use your redraw facility, or how much can be accessed per redraw. There may also be redraw fees to consider, and a home loan with a redraw facility could have a higher interest rate than a more basic loan without one.
Accessing your redraw should be fairly straightforward. Your accessible balance in your home loan may be available to you in your internet banking, just like any other transaction account. You may even be able to redraw money from your home loan by visiting one of your lender’s branches or ATMs. Alternatively, you may need to contact your lender to set up your redraw and access your funds.