Home loan redraw pros and cons

A home loan redraw facility allows you to withdraw any additional payments you have made on your home loan. By making extra payments on your home loan, you could lower the outstanding principal, reducing the interest charged on your loan. Paying extra on top of your scheduled repayments can also help you close the loan earlier. 

With a redraw facility, you can take out the additional funds you paid into your mortgage and use them for another purpose. However, remember that you can only redraw the extra repayments you’ve made – it's not possible to redraw your monthly repayments.

Some lenders may have limits around how much money you can redraw or the number of times you can redraw per year. Some may also charge you a fee for accessing the redraw facility. Furthermore, a redraw facility may not be available to you if you’re on a fixed rate home loan.

A redraw facility allows you to access any extra funds you’ve paid into your mortgage, if needed. For example, if you pay an extra $100 a month on top of your minimum monthly repayment, you’ll have $1,200 available in your redraw facility by the end of the year that you could ‘redraw’ for other purposes. 

While this sounds straightforward, there are a couple of important things to understand with respect to a redraw facility. 

1. How can you build your home loan redraw fund?
2. How much money can you redraw?

How to build your home loan redraw fund?

A redraw facility is only available when you’ve made additional repayments into your mortgage above the minimum repayment amount. That extra amount will be deducted from your mortgage, save you interest, and be accessible via redraw. Some may call this extra amount sitting in your home loan the redraw fund.

Before you start depositing more money with the hopes of redrawing it later, check with your lender about their redraw policy. There are a couple of easy ways to build up your redraw funds:

• Make lump sum deposits towards your home loan whenever you have an excess amount available with you. Windfall gains like inheritance, salary bonuses, and tax refunds can be great ways to increase your redraw funds.
• Another method is to regularly repay more than the minimum repayment amount. This will allow you to increase your redraw fund gradually.

How much money can you redraw from your home loan?

A redraw facility gives you access to the extra payments you made into your loan, also known as your redraw fund or balance. With some lenders, you can withdraw your entire redraw balance minus a month’s scheduled repayment. Others may have minimum and maximum redraw requirements in place, such as an 80% cap on the value you can access, or there may be a limit on the number of redraws you can make.

The amount of your redraw balance you can access at any time is also called the available redraw. Remember to contact your lender and read the fine print to ensure you’re aware of any special conditions.

If you plan to use a redraw facility to save money in interest charges, you should also check how the lender calculates your available redraw over the life of the loan.

Some lenders may reduce the available redraw on your home loan over time so that both your loan balance and available redraw reduce to zero by the end of the loan term. If you see your monthly repayments drop as a result of making additional repayments on your loan, your lender has probably used a part of your redraw balance to adjust your repayments. While this may seem lucrative, as your repayment size could reduce, you’ll not gain much in terms of saving interest on your loan or closing it early.

Sally Tindall, head of research for RateCity, says: “If you’ve got extra money stashed in your home loan in a bid to pay off your loan early, make sure your bank does not lower your monthly repayments, as this will counteract your efforts.”

She adds that “redraw facilities can seem straightforward, but many borrowers don’t read the terms and conditions of their redraw facility and can get tripped up by the consequences of moving money in and out of a loan.”

Making extra payments on your home loan could help you increase the equity in your property. When you redraw these additional funds, it could decrease your equity. Alternatively, you may have the option to leverage your equity to meet other expenses. 

For instance, you could use your home equity as security for a personal loan, which may help you qualify for a lower rate than an unsecured personal loan. It’s also possible to borrow against your equity through refinancing. You may have the option to borrow a lump sum or open a line of credit. However, remember that drawing upon the equity in your house could lead to longer loan tenure, which may increase the cost of the loan to you.