Whilst researching about your mortgage, you may have come across home loans that offer a redraw facility – but what is it?
Basically, a home loan redraw facility allows you to take out any extra repayments that you’ve made over the required minimum repayments on your home loan. Whatever additional repayments you make goes towards an ‘available redraw’ amount which can be withdrawn when required.
Although redraw facilities are a common offering, it can often be a complicated concept to wrap your head around. This guide will help breakdown what a redraw facility really is, the features, benefits and what the big 4 banks are offering their customers.
What exactly is a redraw facility?
A redraw facility is a feature that comes with certain types of loans (mostly in home loans and personal loans). It allows account holders to withdraw any extra money they’ve contributed in the form of loan payments to the bank. The balance of the redraw facility is the amount of extra payments the account holder has already made to pay off their loan, so it’s any extra on top of usual monthly repayments.
To use the redraw facility, banks will often charge additional fees for withdrawing and depositing money. There also may be certain requirements on how much and how often you can redraw in a given period. These specific rules about restrictions are stated in the terms and conditions of the home loan contract you sign.
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How a redraw facility works and its features
For the best use out of your redraw facility feature, you need to be making additional payments towards your home loan whenever you can. This can include a one off lump sum payment or regularly paying more than the required minimum repayment.
- Your minimum monthly loan repayments are $1500
- But you pay $1700 each month for 6 months, which at the end equals an extra $1200 in repayments that you’ve made
- The redraw facility allows you to then access that $1200 extra to withdraw if you need to
If you decide to not use the redraw facility and keep this amount on your loan, these additional repayments reduce the amount of interest you repay over the term of the loan and shortens the amount of time taken to repay the full loan amount.
To access your redraw facility account, you’ll have to activate it first by filling and submitting your lender’s ‘Redraw Authority Form’. Once that’s done, you can access your redraw funds either by filling and submitting the ‘Application to Redraw Payments in Advance’ form by your lender, available online or by request, or by using your lender’s internet banking platform and mobile app.
Lenders also have online redraw services available. Online redraw works in a similar way as transferring funds from accounts online via internet banking or an app. With online redraw you can access any additional repayments you’ve made 24/7 from your device, and it gives you same day access to your funds to use at any time. Although the amount you can access is controlled by your existing internet banking limits, a few lenders have the option of free unlimited redraws with their online redraw facility.
Pros and cons to a redraw facility
Reduce the length of your loan
As mentioned previously, making extra repayments to your loan can reduce the length of your loan and how much interest you pay in the long run. Even if some of those additional repayments are redrawn out, depositing those funds into your home loan will still benefit your repayments. The more additional repayments you make and the less you redraw, the quicker it will be for you to pay off your home loan.
Any interest earnt on funds that you have in a redraw account is taxed at a marginal rate. However, using those funds as extra repayments on your home loan will not earn any taxable interest.
The ability to redraw money can be beneficial in emergencies
Even if you never use the money in your redraw facility, it may become beneficial in times of emergencies when you need the extra money. Especially for lenders that don’t charge any fees and offer unlimited free redraws, this might be of great benefit.
A redraw facility gives you flexibility, especially when your financial situation changes over time. For example, if you need access to the funds for home improvements or renovations, you can simply redraw from your account.
Fees involved in a redraw facility
Some lenders might charge a fee for any withdrawal, either every time or after a certain amount of time. Therefore, someone who never makes any additional repayments will never have enough funds to use their redraw facility, and may be paying fees for no benefit.
Redraw minimum and maximum restrictions
Some lenders can place restrictions on how many redraw transactions you can make within a certain time frame. Some also can restrict you to the minimum or maximum amount that can be redrawn at a given time. This may potentially affect the ability to access the funds if they’re needed in an emergency.
Can increase unnecessary spending habits
The funds in your redraw facility aren’t technically yours. In fact, they belong to the lender (as you’re paying off a loan) who allow you access to it. Redraw facilities can increase unnecessary spending if there are funds available – any funds that are taken out must be put back in before the loan period finishes. This also increases the time to repay the loan because you’re reducing the amount paid to the loan.
Redraw facilities are not available on fixed rate or interest-only loans
Borrowers on a fixed rate loan and interest-only loans don’t have access to a redraw facility, simply because those with these types of loans usually can’t make additional repayments. Even if you can, it may be stated in the terms and conditions of the home loan contract that you cannot open a redraw facility account on the type of loan you’ve signed for.
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What redraw facilities do the big 4 banks currently offer?
Commonwealth’s redraw facilities are only available on Standard Variable Rate Home Loans & Extra Home Loans. There are no set up or monthly account keeping fees and no fees to access your redraw money. Everything you deposit into your home loan reduces the loan balance and saves you interest.
With Commonwealth’s redraw facilities, you can have the opportunity to take a repayment holiday from upcoming scheduled repayments. You may also be able to use the additional payments you’ve made, to put future repayments on hold for a period of time (from 3 to up to 12 months), giving you the control to use your money when it’s needed the most.
You can redraw from your NAB home loan and personal loans. They don’t charge a redraw fee, so you can redraw from $500 up to $150,000 – as often as you like. You can get access to all the funds you’re ahead by, minus one month’s scheduled repayment. After you redraw money however, you must continue to meet your regular repayments.
The quickest way to redraw funds from NAB is through internet banking, otherwise you can check up over the phone or at a branch nearest you. Their redraw facility is cheaper than using a credit card as the interest charged for home loans is lower than any type of credit products offered at the bank.
Westpac redraw facilities are available on Variable Home Loans & Fixed Option Home Loans. To activate your redraw facility account, you can fill in a form or speak to your specialist. Apply to redraw excess funds from your loan at no extra cost up to a maximum total of $30,000 over the life of a new loan (no fee applies). There are no fees on extra repayments on your loan and unlimited redraw (up to the amount of additional repayments).
ANZ offers a variety of home loans available for redraw – including some fixed home loans (and variable personal home loans. If you’d like to access your redraw facility, you will need to be registered for ANZ redraw, and satisfy the conditions set out by the bank. Your loan must be fully drawn, must not be paid out, and if your loan is guaranteed, the guarantors have consented in writing to have the amount redrawn.
There is currently no minimum redraw amount for ANZ, and an approved redraw request completed via internet banking on a business day will generally be in your account the same day.
Words by Joanne Ly
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