Are you in the process of exploring the market to buy property and take on a home loan? If yes, then you might have heard the term ‘redraw facility’ floated in discussion surrounding mortgages.
Redraw facilities are one among many possible features that lenders can offer as a component of their home loan products. In this article, you can find out everything about these facilities, and walk away with all of the information you need to inform your decisions when making comparisons between redraw facilities using Savvy’s online home loan comparison tool.
What is the Definition of a Redraw Facility?
A redraw facility is a feature that works by affording a home loan customer the option to withdraw funds that they have already paid towards their loan as extra repayments on top of their minimum required instalments. These funds can be used as cash for whatever use the customer desires, and the redraw facility can be ‘replenished’ by future advance payments towards the loan.
Redraw facilities are distinct from offset accounts in the sense that, while offset accounts function as regular debit accounts by giving the customer direct access to the funds in the account, redraw facilities cannot be immediately accessed and might also impose a fee for access to these funds.
Put succinctly, redraw facilities provide a way for mortgagees to access funds in between their current loan balance and their original approved loan amount. If your equity has grown and you required more funds, you can usually borrow more based on the property new valuation but this would require a new loan application and approval to be submitted.
How Exactly Can a Redraw Facility Help Me?
The benefits of redraw facilities are that they provide you with the option to access funds which you have previously paid as extra repayments towards your home loan. This allows you to be confident in making extra mortgage repayments as you will be able maintain your financial flexibility moving forwards, while also making extra savings over the life of your loan in the form of interest expenses.
To illustrate how a redraw facility can be useful, it helps to look at an example:
Rob has taken out a home loan of $400,000 with a 3% interest rate and a 30-year term. If Rob’s minimum monthly loan repayments including interest and fees are $1,686, but Rob pays an extra $500 per month for a total monthly payment of $2,186, then over time he contributes extra payments which can later be redrawn. After 12 months of repayments made at a rate of $2,186 per month, Rob will have a total of $6,000 which he can then access in the case of an emergency or for another purpose.
Two years later, Rob decides to carry out renovations on his property and has $12,000 in his redraw facility which he can choose to access. His renovations will only cost $8,000, so he chooses to withdraw this amount, leaving the rest in his redraw account to continue to lower his interest expenses moving forwards.
How Should I Compare Home Loans with Redraw Facilities?
When using comparison tools such as Savvy’s to compare home loans with redraw facilities, there are several aspects of a loan that you should consider. It will be worth considering whether or not various redraw facilities will incur extra fees, and comparing these fees between different lenders.
It is also important to bear in mind when comparing lenders in this context, that depending on the LVR of your prospective loan, some lenders may not offer redraw facilities. Additionally, you will want to take note of which lenders offer redraw facilities for which loan types. For example, some lenders might not offer a redraw facility for an interest-only loan, whereas others might.