What is a redraw facility?

What is a redraw facility?

Katy Holliday - 2 Jun, 2021

When you’re looking for a new home loan or are ready to refinance, you’ll come across an array of different home loan features that can be tacked onto your loan and serve as a real benefit to you. Some features can help you shave years from your home loan and significantly decrease the amount of interest you pay. That’s worth investigating!

One of these special features is a redraw facility. In this guide, we will explore what a redraw facility is, how it works, and the advantages and disadvantages of having a loan that offers you this choice.

What is a redraw facility or home loan redraw?

When there’s a redraw facility attached to your home loan, you have the option to withdraw any extra repayments you’ve made on your home loan that go over the required minimum repayments. You can use this money for any purpose.

How does a redraw facility work?

The concept of a redraw facility hinges on any extra repayments that you make. This process is sometimes referred to as “topping up” your home loan.

When you make additional repayments to your home loan over the required minimum repayments, you can pay off your loan faster and reduce the amount of interest you pay. Even small extra repayments each month can stack up to make a big impact.

To see how much difference extra repayments can make to the life of your home loan, try our loan repayment calculator, which includes options for extra repayments.

If your home loan comes with a redraw facility, you will have the flexibility to access any extra money you put down on your mortgage by transferring the funds back to your bank account as needed. Remember, in doing so, the loan principal will automatically increase as will the future interest.

How it works - an example

There are three steps involved in calculating your redraw availability.
  1. Step 1: You have a minimum home loan repayment of $1,500 per month, but you make an additional repayment of $300 per month to pay off your mortgage faster and decrease the amount of interest you pay.
  2. Step 2: The extra $300 per month you pay on your loan goes into your redraw facility, which continues to grow each month as you add more to it. In a year, you have contributed $3,600 to your redraw account.
  3. Step 3: If in the future you decide you need that extra money to put towards renovations or other expenses, you could redraw it from the facility. Otherwise, you may choose to leave it to take advantage of the savings. However, the process is not always that simple. Over time, some of the redraw balance will be absorbed by your mortgage. Also, not every lender will offer you the flexibility of a redraw facility, and in certain cases you will need to apply either online, on the phone, or in person at your branch to access your money.

How is redraw balance calculated?

Recent changes have been made that affect how redraw balances are calculated. This is so that borrowers pay off their loan within the predetermined term of the loan.

The redraw adjustment is determined by calculating the difference between the current mortgage balance and the original mortgage loan amount if you had never made any extra repayments. These adjustments are usually made on your monthly repayment date.

See this example below from CBA:

Simplified Redraw Adjustment Calculation
Source: CommBank

Prior to these changes, the required minimum repayment was only influenced by your interest rate. Now, if you make extra repayments, your required minimum repayment amount will also be reduced over time, affecting the amount you can access.

If you choose to make smaller repayments in order to have more disposable cash at your fingertips, your redraw balance will continue to reduce as it’s absorbed into the home loan.

Redraw vs home loan offset account

Although a redraw facility and an offset account may seem quite similar, they are very different for a number of reasons. While they can both offer borrowers a great way to decrease the interest they pay on their home loans, there are some key points of difference:

  1. An offset account acts like a regular transaction account, separate from the home loan. A redraw facility is a feature attached to the home loan. 

  2. With an offset account, you can access your money at any time, moving it in and out of the account quickly and you have use of a debit card. Whereas, with a redraw facility it can sometimes take a couple of days to become available.

  3. Offset accounts are much more flexible in that they can be used like a normal savings account to have wages deposited or make everyday transactions.

Read our guide to offset accounts, if you want to learn more.

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What are the benefits of a redraw facility?

Here are some of the advantages of having a redraw facility linked to your home loan.

  • Putting extra funds into your home loan can be a great way to save money or pay off your loan faster, while also giving you peace of mind knowing you can access this money at a later date, should you need it.
  • Not only can you make regular extra payments in small monthly increments, but you can also top up your home loan with larger one-off payments. For instance, with money received from an inheritance.
  • Using the funds in your redraw facility could be better for you financially than using a credit card or applying for a personal loan that comes with high interest rates or other associated costs.

What are the disadvantages of a redraw facility?

Here are some of the possible disadvantages of having a redraw facility.

  • Redrawing extra repayments can mean missing out on future interest savings.
  • There can be limits to the amount you can contribute to your redraw facility annually, along with minimum and maximum amounts you can redraw.
  • Lenders have different rules surrounding how you can access your funds with a redraw facility, and some may limit how you can move your money.
  • Some lenders may require you to pay a redraw fee (although many don’t).

What to look for in a redraw facility

When picking the right redraw option for you, to get the most out of this feature it’s important to look for:

  1. No fees
  2. No extra repayment caps
  3. An online redraw facility

It’s also important to note that home loans that offer bonus features such as a redraw facility or offset account can come with much higher interest rates or fees than your regular ‘no-frills’ home loans.

You will need to carefully consider the value a redraw facility will bring to your life. If you’re redrawing money from your redraw facility, you will likely want to ensure it’s for a beneficial purpose.

Home Loan Redraw FAQs

Need more questions answered? We’ve got you covered.

1.    How much could I redraw?

Some lenders have a minimum redraw amount that can range between $500 and $5000. They may also stipulate a maximum amount that you can redraw in one time or a fixed amount, regardless of how much you have contributed as additional payments.

2.    How often could I redraw?

Again, this will depend on your lender or home loan. Some will offer unlimited redraws for free, while others may have a maximum number of redraws per year or may offer one free redraw per month. It’s best to discuss this in advance with your lender.

3.    Why does my redraw balance reduce over time?

This happens so that both your loan balance and your available redraw will be zero at the end of your predetermined loan term. You’ll find these adjustments are made on your monthly repayment date.

4.    Which types of home loans don’t have redraw?

A redraw facility is most commonly a feature of a variable rate home loan, but many lenders can offer them with fixed home loans too.

Home loan types that don’t offer a redraw facility are:

  • SMSF loans
  • Construction loans
  • Bridge loans
  • Business banking loans

5.    When is redraw not available?

A redraw may not be available to you if you are in default of the loan contract.

There are other reasons a bank may withhold a redraw from you on any additional payments you’ve made. This is always at the lender’s discretion, and is a reason that some borrowers prefer to opt for an offset account.

6.    Does a redraw facility cost extra?

A redraw facility can cost extra if you get hit with a redraw activation fee, a fee per redraw or if you surpass your free redraw limit. Some lenders may charge you as much as $50 per redraw so it’s worth looking for a home loan that won’t charge you these fees, especially if you intend to use this aspect of the feature a lot.

Words by Katy Holliday

On the lookout for a home loan? Try contacting an eChoice broker. With access to 100’s of mortgage products from over 25 lenders, eChoice brokers have the resources to find YOU the right home loan deal.

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