Glamour-less but Effective: Why You Should Take a Second Look at the Redraw Facility
Often overlooked, the redraw facility is not always on the top of a client’s list of desired loan features. It’s a common feature attached to a variable rate home loan, which allows the account holder to withdraw money they’ve already contributed to paying off their loan if they have paid over and above the minimum scheduled repayments. As you’re able to make additional repayments, you can reduce your loan balance and save on interest.
Unfortunately, a redraw facility is not available on construction loans and only very few lenders allow this feature on fixed rate loans.
The great thing about the redraw facility is you can withdraw funds if, and when, they are needed and can keep your funds in your home loan to pay off the principal faster. The amount available for redraw is the difference between what you have paid and how much you were required to pay, less one months scheduled repayment.
Example:
Tom makes $5,000 in extra repayments towards his variable rate home loan over five months, but halfway through the fifth month, Tom gets into an unexpected car accident and needs to pay an insurance excess for the repair of his vehicle.
The redraw facility attached to his home loan allows him to redraw amounts over $600. Tom withdraws $700 to contribute to his insurance bill.
The amount he owes on the life of his mortgage has been reduced due to the four and a half months savings in his redraw facility. He has extra money to cover the cost of the accident plus the benefit of the $4,300 left in his account.
How can you access the facility?
Usually, you can check your loan account online to view your available redraw amount at any time. Alternatively, you can call the customer service team of your lender and ask them to check for you.
After you redraw the required amount from your home loan, you can continue to make regular repayments as normal. You must be aware that the interest component of the repayments you make will increase since you’re now paying interest on a higher loan principal amount.
What are the advantages?
A selling point of the redraw facility is the compound interest earned on your repayments. Because the interest you are being charged on your home loan is likely to be higher than the interest rate you’re able to achieve on any cash savings account – it’s a good deal.
Like an offset account, a redraw facility can help reduce the total interest paid on your loan and shorten the life of the loan. Disciplined loan holders will find that a redraw account goes a long way towards paying off a loan while providing a contingency to pay off future debts.
There are also tax advantages to be aware of: while any interest earned on a cash investment will be taxed at your marginal tax rate, any interest that you save on your home loan by holding money in a redraw facility will not be subject to tax.
Depending on the lender, you may be able to make additional payments at no extra cost and access your redraw funds at any time.
What are the disadvantages?
While the advantages are significant, you still need to be aware that there can be disadvantages – fees and withdrawal restrictions are tied to each withdrawal you want to make. There may also be limits regarding how many redraws you can perform per year.
However, making it more difficult to redraw funds on a regular basis is not necessarily a bad thing – the purpose of the redraw facility is to not withdraw money a week or two after putting it in. The system it works under effectively deters the account holder from redrawing too often and saves you money in the long term.
If you are seeking further information regarding the redraw facility, give us a call on (08) 9417 3399 to speak with one of our brokers to discuss your options.