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What is a redraw facility?

A redraw facility is a feature of some home loans that allows you to access extra principal repayments you’ve made on your home loan.

For example, if you pay $200 a month more than your minimum monthly repayment covering principal and interest, then at the end of the year, you will have $2400 sitting in your redraw facility. Any lump sum payment made in addition to your required home loan repayments also goes into your home loan redraw.

The facility allows you to take back or “redraw” this money down the track.

Lenders take into account the money in your redraw facility and calculate interest on the principal amount minus the money in your redraw, potentially saving you thousands of dollars over the life of the loan.

What’s the difference between offset and redraw?

Redraw is a feature of your home loan; offset is a separate transaction account attached to your home loan. Although both work to reduce the amount of interest you pay on your loan, they operate quite differently.

While redraw comes from making additional payments to your home loan above the minimum required payments, an offset account operates like an everyday transaction account. You can have your salary paid into it, use it to withdraw cash from an ATM and have a debit card linked to it while any money sitting in the account reduces or “offsets” the amount of interest you pay.

A redraw does not come with the same flexibilities as an offset. You may be limited by minimum and maximum redraw amounts and there could be fees attached. It could also take time to access your money in a redraw facility. An offset account gives you immediate access to your funds.

Offset accounts are usually part of a home loan package that also comes with a debit or credit card. You could be hit with a monthly account fee or a higher interest rate to have the offset account so you want to weigh up the different loan products and ensure the savings you make outweigh the costs.

Offset vs redraw: potential savings explained

While having money in redraw or an offset account does not reduce your monthly repayments, it does cut the amount of interest you pay each month, enabling you to pay down your loan faster and potentially save thousands of dollars over the life of the loan.

For example, if you have a $500,000 loan on an average variable rate of 3.03 per cent and have an extra $50,000 in redraw or offset five years into the loan, you will save more than $1500 in interest in one year which can go towards paying your principal off faster.

The interest savings are the same whether the money is parked in a redraw or an offset account.

If maintained, those savings could shave a couple of years off your loan term, reducing your overall costs.

How does a redraw facility compare to a savings account?

A savings account earns you interest on the money you have in your account while a redraw reduces the amount of interest you have to pay on your loan.

However, Australia’s record low interest rates right now mean you’re unlikely to see your wealth grow by parking any additional money you have in a savings account.

You may find that increasing your repayment amount and having that extra money sitting in a redraw facility could offer you greater value.

Consider this scenario: You inherit $50,000 five years into your 30-year $500,000 home loan. If you put that $50,000 into a savings account earning 0.1 per cent interest, you would only earn $50 in one year. You’ll also potentially need to pay tax on that. If you put that $50,000 as an additional lump sum off your mortgage paying the average RBA variable rate of 3.03 per cent interest and have it in a redraw facility, you would save around $1500 in interest in the same year – 30 times the interest you would earn in the savings account.

Can you redraw on a fixed loan?

This all depends on the lender. Some fixed rate home loans allow you to make limited additional repayments of $10,000 or $20,000 a year. However, some will not allow you to access this money while the loan is fixed. At the end of the fixed term when the loan reverts to a variable rate, you can redraw that money. Fixed loans don’t tend to have the same flexible features as variable rate home loans.

Pros and cons of redraw
  • Interest savings: You can cut the amount of interest you pay on your home loan by making extra repayments and keeping them in a redraw facility.
  • Pay down your mortgage faster: By reducing the amount of interest you pay, you could own your home sooner.
  • Flexibility: Withdraw the extra repayments when you need them to pay for unexpected bills, holidays or renovations.
  • Repayment holiday: If you’re ahead in your repayments, you may be able to take a break or “holiday” from some upcoming scheduled payments.
  • Fees: Some lenders charge fees for each redraw you make.
  • Limits: You may be restricted by a minimum or maximum redraw limit or there may be a cap on the number of redraws you can make over a certain time period.
  • Loss of long-term savings: If you redraw the extra payments you’ve made, you could lose out on any long-term savings you may have made.
  • Your request can be denied: Lenders can refuse your request for a withdrawal. It’s at their discretion.
  • Terms can change: Lenders will often have clauses allowing them to change the terms of the redraw facility or cancel it – but they do have to tell you. Always read the product disclosure statement carefully.

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Does redraw affect your credit score?

Redrawing your extra repayments should make no impact on your credit score. While your additional repayments may reduce your home loan term by a year or two, redrawing the funds will simply see your loan revert to its original term.

Your credit score is much more likely to be affected by making multiple home loan applications. If you apply with multiple lenders in addition to applying for other types of credit such as a credit card, the number of enquiries can damage your credit score.

How does redrawing on home loans work?

A redraw facility is a feature of a home loan that gives you access to any extra payments you’ve made on the principal portion of your home loan.

Making extra payments and having them in the redraw facility reduces the amount of interest you need to pay on the loan. For example, if your home loan is for $400,000 and you have made extra repayments of $20,000 that is sitting in the redraw facility, interest is calculated on $380,000. The less interest you're charged, the faster you can potentially pay off your loan, and the more time and money you may save over the long term.

If you fancy a holiday or need a bathroom renovation, your available redraw is $20,000 and you can access that money through online banking, over the phone or in person at a branch. However, there may be fees involved.

There may also be limits on how much you can redraw and how often.

How to redraw

  1. Contact your lender: You can do this online, over the phone or in person at a branch.
  2. Apply: You may need to fill out a form either online or in person. If there are two signatories on the loan, both signatures may be required.
  3. Receive the funds: This can be instant or it can take a couple of business days for the funds to be placed in your chosen account.

How much can I redraw?

You can only withdraw your redraw balance, that is the amount you have paid above your regular repayments. Some lenders will allow you to redraw the full amount minus one month’s scheduled repayment.

Redraw amounts may be limited by minimum and maximum requirements and there may be caps on the number of redraws you can make.

NAB for example has a minimum redraw of $500 and a maximum of $150,000 a day.

What are redraw fees?

Redraw fees are money you pay your lender to access the redraw facility on your home loan.

You could be hit with a one-off redraw activation fee to activate the feature on your loan, as well as a fee for each redraw you make. Your lender may offer a set number of free redraws per year then charge a fee once that limit has been reached.

What happens to redraw when you refinance?

If you refinance for a larger loan amount, any extra repayments you have made on your previous loan may form part of the equity on your new loan. Depending on the size of it, your loan to value ratio (LVR) may be affected. If the bigger loan means your LVR is now above 80 per cent, you may have to pay Lenders Mortgage Insurance (LMI).

On the other hand, if you are refinancing for a better rate and not increasing the loan size, the money you had in redraw could reduce your LVR and give you access to an even cheaper interest rate. But once it’s considered part of your equity, you may not be able to access it so easily.

How does a redraw facility work?

A redraw facility attached to your loan allows you to borrow back any additional repayments that you have already paid on your loan. This can be a beneficial feature because, by paying down the principal with additional repayments, you will be charged less interest. However you will still be able to access the extra money when needed.

What is a redraw fee?

Redraw fees are charged by your lender when you want to take money you have already paid into your mortgage back out. Typically, banks will only allow you to take money out of your loan if you have a redraw facility attached to your loan, and the money you are taking out is part of any additional repayments you’ve made. The average redraw fee is around $19 however there are plenty of lenders who include a number of fee-free redraws a year. Tip: Negative-gearers beware – any money redrawn is often treated as new borrowing for tax purposes, so there may be limits on how you can use it if you want to maximise your tax deduction.

How do I apply for a home improvement loan?

When you want to renovate your home, you may need to take out a loan to cover the costs. You could apply for a home improvement loan, which is a personal loan that you use to cover the costs of your home renovations. There is no difference between applying for this type of home improvement loan and applying for a standard personal loan. It would be best to check and compare the features, fees and details of the loan before applying. 

Besides taking out a home improvement loan, you could also:

  1. Use the equity in your house: Equity is the difference between your property’s value and the amount you still owe on your home loan. You may be able to access this equity by refinancing your home loan and then using it to finance your home improvement.  Speak with your lender or a mortgage broker about accessing your equity.
  2. Utilise the redraw facility of your home loan: Check whether the existing home loan has a redraw facility. A redraw facility allows you to access additional funds you’ve repaid into your home loan. Some lenders offer this on variable rate home loans but not on fixed. If this option is available to you, contact your lender to discuss how to access it.
  3. Apply for a construction loan: A construction loan is typically used when constructing a new property but can also be used as a home renovation loan. You may find that a construction loan is a suitable option as it enables you to draw funds as your renovation project progresses. You can compare construction home loans online or speak to a mortgage broker about taking out such a loan.
  4. Look into government grants: Check whether there are any government grants offered when you need the funds and whether you qualify. Initiatives like the HomeBuilder Grant were offered by the Federal Government for a limited period until April 2021. They could help fund your renovations either in full or just partially.  

What are the different types of home loan interest rates?

A home loan interest rate is used to calculate how much you’ll pay the lender, usually annually, above the amount you borrow. It’s what the lenders charge you for them lending you money and will impact the total amount you’ll pay over the life of your home loan. 

Having understood what are home loan rates in general, here are the two types you usually have with a home loan:

Fixed rates

These interest rates remain constant for a specific period and are a good option if you’re a first-time buyer or if you’re looking for a fixed monthly repayment. One possible downside of a fixed rate is that it may be higher than a variable rate. Also, you don’t benefit from any lowering of interest rates in the market. On the flip side, if rates go up, your rate won’t change, possibly saving you money.

Variable rates

With variable interest rates, the lender can change them at any time. This change can be based on economic conditions or other reasons. Changes in interest rates could be beneficial if your monthly repayment decreases but can be a problem if it increases. Variable interest rates offer several other benefits often not available with fixed rate home loans like redraw and offset facilities and free extra repayments. 

What is a home loan?

A home loan is a finance product that allows a home buyer to borrow a large sum of money from a lender for the purchase of a residential property. The home is then put up as "security" or "collateral" on the loan, giving the lender the right to repossess the property in the case that the borrower fails to repay their loan.

Once you take out a home loan, you'll need to repay the amount borrowed, plus interest, in regular instalments over a predetermined period of time.

The interest you're charged on each mortgage repayment is based on your remaining loan amount, also known as your loan principal. The rate at which interest is charged on your home loan principal is expressed as a percentage.

Different home loan products charge different interest rates and fees, and offer a range of different features to suit a variety of buyers’ needs.

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.