Home loan redraw facilities explained

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 erase the 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.

Additionally, it’s worth keeping in mind that the amounts you’d have to pay as a result of redrawing money from your home loan will be determined by your home loan rate – so if you’re currently on a competitive interest rate, the financial impact of using your redraw facility will be less than that of someone on a higher interest rate using a redraw facility.

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 your nearest 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.

Depending on your lender, you may or may not have to pay any additional fees 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.

You generally won’t have to pay tax on the money you redraw from your home loan account.

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.

Let’s go over some of the upsides and downsides of having a redraw facility attached to you your home loan.

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.

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; 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 over your loan term. While the balance of an offset account is freely available and offset against your home loan amount, your redraw balance is simply comprised of the extra home loan repayments you’ve made so far over the life of the loan.

It’s worth noting that redraw vs offset 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.

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 home loan with a fixed interest rate 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.