We explain how redraw facilities work and how they can help you pay less in interest.
17 March 2022|5 minute read
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.
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.
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.
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.
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.
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.
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:
On the other hand, you may benefit more from an offset account if:
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.
An offset account can help you save thousands of dollars in interest so you can pay off your home loan faster.
Find out how much you can save in interest over the life of your loan by making extra repayments.