How home loan redraw facilities work

By   |   Verified by Debbie Duncan   |   Published 25th July 2022

  • Learn about home loan redraw facilities.
  • Understand the difference between a redraw facility and an offset account.
  • Discover the pros and cons of a home loan redraw facility, as well as potential risks.

Navigating a mortgage redraw can be tricky if you’re not properly informed. Whether you are considering applying for a home loan with a redraw facility or already have one and are considering using it, this guide will explain the pros and cons so you can make a better decision.

Read on for more about what a redraw facility can do for you and how it works.

What is a home loan redraw facility?

A home loan redraw facility allows you access to payments made above and beyond the bank’s minimum repayments when paying off your home loan.

Account-holders are permitted to withdraw money that contributed towards their home loan.

The balance of this redraw facility depends on the additional payments made towards the loan on top of the minimum amount required by the bank.

Reasons to get a home loan redraw facility

There are good reasons to get a home loan redraw facility, if executed properly.

  • Saving on interest. Home loans are known to have higher interest rates than savings accounts. You can take advantage of this by paying more money into your home loan and saving on interest instead of keeping that money in your savings account.
  • Fewer costs in the long run. Because you are making extra payments towards your loan, you may pay lower interest rates in the long term toward your mortgage.
  • Liquidity. You have more flexibility with your money since you can withdraw extra payments when you need cash.

Redraw facility vs offset account

A redraw facility and an offset account are two different home loan features. Depending on your circumstances or goals, a redraw facility or offset account may be appropriate.

  • Offset accounts essentially work like a transaction account and give you straightforward access to your money. The drawback of a home loan with an offset account is that it usually has higher interest and fees than a redraw facility.
  • Redraw facilities give you to access any extra payments that you’ve made toward your home loan. If you can pay consistently above the minimum for your loan, it could be a good option for you in the long run. For example, you could redraw from your home loan to pay for a renovation.

What to look for in a redraw

It is the finer details of redraw facilities that should be considered, so they don’t catch you out at a later stage.

  • Allowance. Certain lenders have a set number of withdrawals you can make each year. It is good to know the value so that you can plan in advance.
  • Potential fees. Lenders will often charge a base fee for having a home loan with a redraw facility.
  • Redraw procedure. Some lenders may allow you instant access to your funds, while others may need you to fill out forms and submit them before seeing your money.

What home loans don’t offer a redraw facility?

Fixed-rate home loans don’t usually offer a redraw facility and variable-rate home loans are more likely to include redraw facilities.

Other loans which don’t offer redraw facilities include business banking loans, construction loans, and bridging loans.

Will using a mortgage redraw affect my credit score?

Using a mortgage redraw will not affect your credit score. Redraw facilities are a practical way to save. This is because you reduce the interest you pay on your home loan over time instead of merely earning interest in a savings account. There is no negative impact on your credit score when doing this.

Pros and cons

Pros

  • Reduces interest on home loan payments. By paying more on your home loan each month, you save on the amount of interest you would have to pay.
  • Redraw from extra payments. An effective, guilt-free way to get cash quickly when in a financial emergency.
  • More cost-effective than redrawing on other debt options. Home loans have much lower interest rates than personal loans or credit cards.

Cons

  • Fees for redrawing. Certain lenders will charge a small fee each time you want to redraw.
  • Redraw amount restrictions. There is usually a limit on how much you can redraw, depending on your extra payments.
  • Lenders may change their terms and conditions. This could potentially block access to your funds or force you to withdraw your available balance.

Final thoughts

Getting a redraw facility is a great way to save on interest when paying off your home loan.

If you are considering a home loan with a redraw facility, contact your lender to discuss the details and terms of the loan before you make your decision.