When getting a home loan, one of your alternatives is to get one with a redraw facility.
Here’s what redraw is and why you should think about it.
The redraw notion is straightforward: You can make extra payments on top of the minimum payback amount when paying off your property loan. Some people add tax refunds or inheritances to their loan, while others just add $50 or $100 extra to their monthly payments.
Whatever suits you.
Redraw is most frequent on basic, variable-rate loans, with only a few lenders giving them on fixed-rate loans.
What’s the best thing about redraw?
The more you pay towards your loan, the faster it will be paid off and the less interest you will have to pay. As a result, every little amount helps.
On an $800,000 loan, for example, putting $100 extra into redraw will cut 18 months off your loan and save you more than $50,000 in interest (based on a 30 year loan at 5.44%). Pay off your debt sooner and save money on interest.
Sounds great, right?
The actual beauty of the redraw, as opposed to extra payments made on loans with no redraw, is that you still have access to any additional payments you make; the money isn’t locked away for the life of the loan.
So, if your finances get tight, or if you simply want to take a vacation to Hawaii or update your kitchen, you can use your redraw amount.
Of course, leaving your extra payments alone and gradually increasing to them is the ideal option. If you do redraw your payments, your total loan amount increases, and so does the interest over the life of the loan.
Access your redraw cash.
Different lenders have different procedures, but in general, access to redraw is simple, and you can get your money right away.
Some lenders may even let you withdraw money from an ATM, while others require you to transfer funds between accounts, which you can normally accomplish online.
Keep in mind that some lenders have restrictions, such as permitting just one redraw per year, and some may charge a fee to utilise the service, so if you believe you might want to use redraw at some point, check the rules beforehand.
Downsides of redraw
As we mentioned, redraw often locks you in to a variable-rate loan. This might not suit borrowers who want short-term surety in their repayments. A fixed rate loan may be preferred.
The other downside is that redraw loans don’t always offer the best interest rate, it is possible a more fully featured loan including an offset account might have a lower rate but these often come with ongoing fees.
Talk to us
Speak with your Mortgage Broker Sydney loan expert to learn more about the benefits of redraw and how these loans compare with offset products. Your broker will share instances of how redraw has benefited others in the past. We can help you do the sums to see if redraw is right for you.
If you decide you want a loan with a redraw facility, your broker will offer you several options and assist you in selecting the loan that best meets your needs.
Our services come at no cost to you, although if you do take out a loan, lender fees might apply.
Michael began his career in the finance industry over 35 years ago. He progressed through the ranks at the CBA in both retail and corporate lending, culminating in a senior position as a Corporate Relationship Executive. His decision to leave the bank in 2003 to become an independent mortgage broker was driven by his desire to assist everyday customers break through the jargon of the banking world and access the best loan products in the market. His experience is wide-ranging from helping first time buyers to large commercial enterprises. What Michael doesn’t know about home loans, simply isn’t worth knowing!