If you’re shopping around for a home loan, you might feel a little overwhelmed by all the different types of features you can get on a home loan these days. Offset account this, repayment flexibility that – there’s a lot of bells and whistles to consider!
To help you on your way, we’ll take you through the home loan redraw facility. While it’s often confused or conflated with an offset account, it functions in a completely different way, and comes with a different set of pros and cons that need to be taken into account.
So, let’s go over home loan redraw facilities, how they work, their pros and cons and which kinds of borrowers they might suit.
A home loan redraw facility is a home loan feature that gives you the ability to access and redraw extra repayments you’ve made towards your home loan. It’s a feature that comes attached to your home loan account, meaning it doesn’t require a separate account like an offset account does.
Home loan redraw facilities are designed to give proactive borrowers a bit of extra flexibility when it comes to their cash flow. If at any point you need some extra cash, you can access the funds you’ve built up in your redraw facility by having made extra home loan repayments, and withdraw them as a lump sum.
However, no action is without consequences, and in the case of home loan redraw facilities, there are a few of those to keep in mind.
The first is that, by redrawing your extra repayments out of your home loan account, you’ll be increasing your home loan balance. This in turn means you’ll have erased progress you’d made towards paying off your home loan principal (i.e. the amount you borrowed) and will incur higher home loan interest charges on your new, higher principal going forward (if you don’t replace the money you redrew).
That being said, accessing the funds you’ve built up in your redraw facility isn’t always a bad move, as it’ll all depend on your current financial circumstances and priorities.
Using a redraw facility will generally be a simple process. You’ll first need to determine your available redraw, which will typically be the total sum of your extra repayments; sometimes, minus one month’s repayment amount depending on the lender.
You can assess your available redraw either in-branch, by phone or by utilising your lender’s online banking platform or banking app. Some lenders even offer redraw via a debit card, meaning you could make your redraw in the form of a cash withdrawal at an ATM.
Once you know how much you have available for redraw, you can request a redraw of your desired amount. Depending on your lender and the platform you used to place the redraw request, your funds could arrive instantly or may take a few business days to land in your transaction account.
Extra or additional repayments are any amounts you pay towards your home loan that are in excess of the minimum repayment amount for that period. So if you’re just making your minimum monthly repayments without paying anything extra, you probably won’t have any funds available to redraw.
Comparing redraw facilities and offset accounts is a bit like comparing apples and oranges – they do different things and may or may not benefit you depending on your personal financial circumstances.
The primary practical differences between an offset account and a redraw facility is that an offset account is essentially a normal bank account that you can make and receive payments with, whereas a redraw facility is a feature that comes as part of your home loan.
An offset account is a transaction or savings account you can keep your money in and receive a handy interest offset while it’s there. A redraw facility functions more as a ‘just in case’ feature, as if you’re the type of borrower to make additional payments towards your home loan, you probably don’t want to redraw them unless it’s necessary.
That being said, both features are used to reduce the amount of interest you’re paying on your home loan. While the balance of an offset account is freely available and offset against your home loan amount, your redraw balance is simply a portion of the home loan repayments you’ve made so far over the life of the loan.
It’s worth noting this isn’t an either/or proposition; it’s possible to have both an offset account and a redraw account on the same home loan, which you may decide is the right option for you.
Let’s go over some of the upsides and downsides of having a redraw facility attached to you your home loan.
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Keep in mind that these points are fairly general and may not apply to your specific financial situation. You may want to seek financial advice from a mortgage broker or financial advisor regarding the suitability of a redraw facility for you and your needs.
Depending on your lender, you may or may not have to pay for a redraw facility. Your lender may charge a redraw fee on individual redraws; however, lenders typically don’t charge an annual fee for redraw facilities like they do for offset accounts.
While the availability of a redraw facility will vary by lender and product, you generally won’t be able to get a redraw facility on a fixed rate loan or a construction loan.
If you’re on a fixed rate home loan and you’re not content to wait out the fixed-rate period, you could potentially refinance to a variable rate home loan. However, it’s worth mentioning that this will typically incur several fees.
You generally won’t have to pay tax on the money you redraw from your home loan account, as that money was likely already taxed before it got to you, and you paid it into the home loan in the first place.
Those with investment home loans specifically may want to research the potential tax ramifications of using a redraw facility, or seek professional advice on the matter from a financial advisor.
Stephen has more than 30 years of experience in the financial services industry and holds a Certificate IV in Finance and Mortgage Broking. He’s also a member of both the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) and the Mortgage and Finance Association of Australia (MFAA).
Stephen leads our team of Home Loan Specialists, and reviews and contributes to Compare the Market’s banking-relating content to ensure it’s as helpful and empowering as possible for our readers.
If you’re still undecided as to what you think may be right for you, book in a time to chat with one of our Home Loan Specialists, who may be able to assist you with your specific needs.
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