Home loan redraw facilities explained

Our Aussie guides were created to help you navigate the home loan and property space, so you can feel more confident throughout your home buying journey. 

A redraw facility is one feature you might consider as it can provide the flexibility to help you pay down your mortgage sooner.

In this article, we cover what a redraw facility is, how it works, the benefits and drawbacks and how it differs from an offset account.

What is a redraw facility?

A redraw facility is a home loan feature that gives you the flexibility to access any extra repayments you’ve made on your home loan.

How does a redraw facility work?

A redraw facility is a great way to free cash flow when you need it. It’s important to note that you’ll only be able to withdraw funds from the additional repayments made on top of your minimum monthly repayments.

Let’s say you opened a redraw facility 6 months ago when you refinanced to a variable rate home loan. Each month since then, you’ve made extra monthly repayments of $500 on top of your minimum monthly repayments.

Thanks to your redraw facility, you’ve shaved an additional $3,000 off your principal amount, meaning you’re paying less in interest than if you had just made your minimum monthly repayments. You are also free to access the additional $3,000 if you need it.

Depending on your lender, you’ll be able to request a withdrawal from your redraw facility via online banking or a mobile banking app, giving your lender a call or visiting a store or branch.

It’s important to keep in mind that lenders will have different minimum and maximum redraw amounts and you may be charged a fee each time you make a withdrawal.

Can you get a redraw facility if you’re on a fixed rate home loan?

While it depends on the lender, you typically won’t be able to have a redraw facility on a fixed interest rate home loan.

On the other hand, you shouldn’t encounter any issues setting up a redraw facility on a variable rate loan or the variable portion of a split rate loan.

It’s a good idea to discuss this with your broker or lender so you can explore the home loan options that suit your specific home loan needs.

What are the benefits of having a redraw facility?

• Own your home outright sooner: a redraw facility can give you the confidence to make extra home loan repayments, helping you pay off the principal on your mortgage faster. Use Aussie’s Home Loan Extra Repayments Calculator to find out how much sooner you could own your home by making extra repayments

• Reduce your interest on principal: by making additional repayments and reducing your principal amount sooner, you end up paying less interest over the life of your loan

• Free cash flow: a redraw facility gives you the flexibility to access any additional repayments you’ve made on your home loan and free up cash flow when you need it.

What are the drawbacks of having a redraw facility?

• Withdrawal fees: depending on your lender, you could be charged a small fee every time you make a withdrawal. Some lenders will allow you to make a limited number of free withdrawals before they start charging you

• Withdrawal limits: some lenders will place minimum withdrawal limits, so you may need to cash out more than you’d like each time you withdraw

• Waiting times to receive funds: while some transactions might be instant, you may have to wait a few business days before you receive the cash you’ve withdrawn

• Activation fees: many lenders will charge a one-off set-up or activation fee when you first open your redraw facility

• Ongoing account fees: depending on your lender, you may be charged a flat monthly or annual fee to keep your redraw facility running.

How do you get a redraw facility with your home loan?

When you’re searching for a home loan or refinancing your loan, it’s a good idea to mention to your lender or broker that you’d like access to a redraw facility. This way, they can present the home loan options that will appeal to you and your home loan needs.

You’ll likely be charged a one-time set-up fee before you’re granted access to your redraw facility.

If you’re on a fixed rate home loan, you may not be able to gain access to a redraw facility until your home loan reverts to a variable rate after the fixed loan term ends or you refinance to a variable rate loan.

What’s the difference between a redraw facility and an offset account?

There can be a bit of confusion surrounding the differences between the two. While they are similar in that they help reduce the amount of interest you pay on your principal, they function a little differently.

An offset account is a transactional savings account that’s linked to your home loan balance. Any funds deposited into your offset account are used to offset this balance. Therefore, the more in your offset, the less interest on principal you pay.

For example, let’s say you have an outstanding loan balance of $350,000 on your home loan. If you deposit $50,000 of your savings into your offset account, you’ll only be charged interest on $300,000.

Keep in mind that if you decide to take out money, for example $4,000 for a holiday, this reduces your offset balance to $46,000. That means you’ll be charged interest on $304,000.

Remember that interest is calculated daily, so as you take out and put money into your offset account, the interest you’re charged will fluctuate accordingly.

Another difference between a redraw facility and offset account is that with an offset account, you can take out money as often as you please without incurring any fees. This is because an offset works just like a transactional bank account.

However, lenders will usually charge an ongoing annual fee of around $200-$400 to keep your offset account open.

Is it better to have money in a redraw facility or offset account?

It depends on which feature you’re more likely to make the most use out of.

If you’re on a variable rate home loan, you’ll typically be able to access both if you want both of these features included in your home loan.

However, if you prefer to only choose one, there are a few things you can think about that can help make your decision easier.

A redraw facility might be right for you if:

• You want to make extra repayments to pay off your home loan sooner
• You like having the flexibility to be able to withdraw these funds when you need them
• You don’t plan on making regular withdrawals.

On the other hand, you may benefit more from an offset account if:

• You have a substantial amount of savings sitting in your bank account
• You want the flexibility to dip in and out of your savings whenever you choose
• The amount you save on interest by offsetting your loan amount will outweigh the annual operating fees for an offset account.

Do you have any questions about redraw facilities or are you looking for some financial advice on your home loan?

Your local Aussie Broker can chat through the pros and cons and help you decide what’s right for you – just book a time to chat.

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