Home Loan Redraw Pros and Cons
A home loan redraw facility allows you to draw cash out of the extra repayments you have made on your home loan. It is a great thing to have when you need cash quickly, but can also pose some issues.
Why should I get a redraw facility?
Have you ever needed a large sum of cash right away? Maybe you need to make emergency home or car repairs, pay for emergency health issues or pet care or maybe you have recently become unemployed at a bad time. These things and much more can happen in an instant, and finding quick cash is never easy.
This is where a redraw facility can offer you the help that you need, and in a much more secure and stable manner than other quick cash strategies (such as high interest personal loans).
Drawing on your extra home loan repayments is a guilt free alternative to getting access to some quick cash when you need it the most.
What’s the difference between a redraw facility and offset account?
A redraw facility and offset account are two separate features that are commonly offered with home loans.
The two features both relate to extra home loan repayments. But while a redraw facility is about excess repayments that have already been made, an offset account relates to payments that are to be made.
An offset account is an account that its balance works against the remaining principal of your home loan.
A redraw facility instead relies on extra repayments that have already been made, allowing you access to these whenever is needed.
What should I be looking for in a redraw facility on my home loan?
While most redraw facilities will be very similar in nature, it’s very important to look at their finer details as they could be an issue for you in the future.
The details to consider are as follows:
- Most lenders will charge you a flat fee per month for having a redraw facility on your home loan. Research different lender’s fee schemes closely, as there could be some considerable differences including their size and how they are structured.
- Lenders may also be looking to charge you a sum of money per redraw. This sum will usually fall under $100, with many lenders not charging anything at all.
- The redraw process can differ from lender to lender. Some will prefer a slower process where you must submit forms to access your redraw facility. Others may simply allow you to do this instantly through a banking app or online banking.
- Lenders may have a set number of redraws that you are allowed per year. This could also be a set amount of free redraws with anymore requiring payment. Some lenders may not have any restrictions over number of redraws.
Minimum/maximum amount on redraws
- Some lenders may have a requirement regarding the minimum or maximum amount of money redrawn per transaction. Not all lenders will have this requirement, but you should be more focussed on there not being a maximum redraw limit.
The pros and cons of a redraw facility on a home loan
Work out if a redraw facility on your home loan is right for you.
Redraw from your extra loan repayments
A great help when you need cash, fast. A redraw facility is perfect for dealing with emergencies, buying a new car or home improvements.
Save on interest payments
Having a redraw facility will entice you to make extra repayments on your home loan. This means you will save money in the long term on your home loan by paying less interest.
Cheaper than other debt options
Redrawing on your home loan will work out to be far cheaper than redrawing on other debt options such as credit cards or personal loans. This is because the interest rates on your home loan should be far lower than your other debt options.
Save on tax
You will need to pay tax on the interest that you earn from your savings account. Using these savings to make extra repayments on your home loan (in turn growing the amount in your redraw facility) means you will not need to pay tax on this interest.
Some lenders may place a restriction on the amount in extra repayments you can make at any given time, limiting the amount you can get from your redraw facility.
Some lenders may charge you a fee every time you wish to redraw.
Redraw facilities are less common with fixed rate home loans then they are with variable rate home loans.
Temptation to redraw
The temptation to redraw from extra loan repayments may be too much for some. This could mean unnecessary spending and will both lessen your ability to redraw and your savings on interest in the future. Redraws should be reserved for emergencies and larger financial decisions.
Top tips to help you decide if a redraw facility is right for you
Navigating home loan redraw facility offers from lenders can be difficult. Here are some tips to help find the best deal for you.
Redraw facilities aren’t right for everyone. If you get one and don’t need it, you could end up paying an unnecessary amount of money in fees over the life of your loan. Some questions you could ask yourself are:
- Am I in a position to make extra repayments on my loan?
- Is another option like an offset account more suitable to me?
- Do I have other options to cover emergency costs?
When looking for a redraw facility within your home loan, don’t be tempted completely by its inclusion in a home loan product. Look at the other major features of the loan including:
- Interest rates.
- Annual fees.
- Required LVR.
These aspects should be the main points of focus when looking for a home loan as it will be a greater influence on how much money you spend.
These can include:
- Transaction fees, annual/monthly fees.
- A minimum or maximum allowance of redraws per period.
- Restrictions over how little/how much you can redraw at any given time.