A redraw facility allows borrowers to access any additional funds they have paid into their loan at generally speaking, no cost. It gives home owners flexibility to pay additional funds into their home loan to pay their loan off faster. However, should the need arise, there is the option to redraw the funds back as, and when required.
How does a redraw facility work?
A redraw facility allows you to make additional repayments either as a lump sum or at regular intervals. You can decide on the amount and frequency that you pay additional funds into your loan. For example, you may deposit your tax return every year, or make an extra $50 per week payment from your salary.
On your loan account, you will see your existing loan balance and the redraw amount. You are able to redraw these funds at any time, and most lenders do not charge a fee to do so. The funds will be available immediately. Do note there is usually a minimum redraw amount – such as $500. Check with your lender.
Pay your loan off faster and decrease your interest paid
A redraw facility will help you to pay your loan off faster by decreasing your interest. Even if you redraw some of your funds, the amount of interest will be less for the time the funds were paid into the loan account.
Cash confidence
A redraw facility also gives you the confidence to know you have funds on hand if you ever need them. It also gives you some wriggle room should interest rates go up.
No fixed home loans
It is important to note that redraw facilities are common in variable loans and not for fixed rate loans. Fixed rate loans generally do not come with the added features of a redraw or offset account.
Minimum redraw amount
As noted above, most banks will have a minimum redraw amount.
Fees
Some banks may charge a minimum fee per redraw or have a limited number of redraws available each calendar year.
Your cash remains yours
An offset account means your cash is available to you whenever you need it – for living expenses, spending or savings.
It is yours to use as you like, whilst still being out to work to decrease your interest.
Less interest over the life of your loan
With interest calculated daily, money in your offset account will decrease the total amount of interest you pay over the life of your loan.
Fee
Fees Some banks may charge a fee for your offset account so check with your lender. Be sure the savings you make cover the cost.
Temptation
With money easily accessible via a debit or cheque card, there is a temptation to spend your money for readily when compared to a redraw facility.
We often get asked the question ‘Where should I direct my money – my loan or offset account?’ The decision is entirely up to you and both will help to reduce the interest on your home loan. Which in turn means your loan will be paid off faster. When funds are sitting in an offset account, there can be the temptation to spend it. When funds are deposited into your loan, there is less temptation to redraw and spend.
At Organic Home Loans, we are here to assist you in explaining your loan feature options as straightforward as possible. We cut through the red tape and provide you with the facts. The more informed you are about banks’ expectations and requirements, the greater your chance of a successful outcome.
Let Organic Home Loans help you choose the right home loan and features and put you in the best stead to find the home of your dreams. Speak to our home loan experts today.
