What is a home loan redraw and how does it work?

Whether you’ve just started to compare home loans or you’re in the process of paying one off, there are plenty of home loan features you’ll likely come across, and home loan redraw is one of them.

Home loan redraw is when you access extra repayments you’ve made on your mortgage because you want to use the funds for a different purpose. In this guide, we’ll look at what a home loan redraw is, how it works, along with what the benefits and drawbacks are.

A home loan redraw is when you withdraw extra repayments you’ve already made on your home loan, often because you’d like to use the money for another purpose.

The key aspect to note here is extra repayments on your home loan – in other words, you can’t access money from a redraw facility if you haven’t made additional repayments on top of your minimum repayments.

It can be a good idea to make additional repayments if it’s within your means, as it will reduce the amount of interest you pay on your mortgage.

Therefore, it can be beneficial to have money in your redraw facility as it reduces the overall balance of your home loan, which lowers the interest you’ll pay.

A home loan redraw lets you take this additional money back out should you need to, but keep in mind that withdrawing these funds will in turn increase your remaining balance and cause your interest to rise.

You can use Mozo’s extra repayments calculator to get an idea of how much interest you can save by making additional payments on your home loan.

When you first agree to the terms of your home loan, you can opt to pay your mortgage weekly, fortnightly or monthly. Whichever you choose, there will be a minimum repayment you’re required to pay each billing cycle.

A redraw facility is a feature of some home loans that allows you to make additional repayments on your mortgage if you want to, while still enabling you to withdraw the extra payments at a later date.

Redraw facilities are most often found on variable rate home loans, but there are also plenty of fixed rate home loans which offer this feature as well.

Be aware that some lenders may put limits on how much money you can redraw at any one time. For example, your lender may allow you to withdraw as much as you want, as long as you keep enough in your redraw to cover your next scheduled repayment.

Other lenders may specify a minimum and maximum amount you can redraw in any one transaction.

If a home loan redraw is a feature you’re interested in, keep in mind that some lenders will charge you a fee to redraw your funds, while others will offer a redraw facility for free.

Home loan redraw example

A couple are paying off a $600,000 home loan and the minimum repayment they need to make is $2,000 a month. However, if they wanted to pay off the home loan faster, they could also make extra repayments on top of that $2,000 – say, an additional $100 a month.

Now, here’s where home loan redraw comes in.

Over the years the couple have made $7,000 in extra repayments, but now they’d like to do renovations to their kitchen. Using the redraw facility available with their home loan, they can still access that $7,000 in extra repayments and put it towards paying for the renovations.

Not all lenders allow redraw, and in some instances you might have to activate the redraw facility before you can access your money – either through an online form or a form which you’ll need to submit in-person at a branch.

Pros

• Paying less interest: Making extra repayments helps you pay off your home loan faster and reduces the amount of interest you’ll pay over the life of the loan. You’ll still have access to any extra repayments through the home loan redraw should you need the money later on.
• Flexibility in growing your balance: You can grow your redraw balance by regularly making extra payments, but you can also make one-off payments too (depending on any caps stipulated by your lender). For example, a one-off payment may come from an inheritance or a bonus at work.
• Getting ahead: Growing your redraw through extra repayments means you may be able to take a break from regular payments further down the track. This is referred to as a home loan repayment holiday.
• Avoid other loans: Withdrawing funds from your redraw facility can help you avoid taking out another loan to fund big purchases. For example, dipping into your redraw balance so you can buy a new car can be more cost effective than taking out a personal loan.

Cons

• Redraw restrictions: Lenders can limit the amount of money you can redraw at any one time. This can be done by setting a minimum and maximum amount that can be withdrawn in each transaction, or allowing you to redraw as much as you want, minus enough to cover your next scheduled repayment.
• Extra repayment restrictions: Lenders can limit the amount of extra repayments you can make each year. This can impact your ability to lower the interest on your home loan, and also limits the amount you can redraw.
• Watch out for fees: There are plenty of providers that won’t charge you a fee to access your redraw facility, but there are also a number that do. Keep this in mind when you start to compare home loans.
• Variable rate home loans: You’ll find that variable rate home loans are more likely to feature home loan redraw, though it can still be available on fixed rate home loans.

A redraw facility and an offset account are features that can be found on a home loan, and both can lower the amount of interest you owe. But what is an offset account, and how does it differ from a redraw facility? Let’s take a look.

As discussed, a redraw facility lets you make extra repayments on your home loan, while also allowing you to withdraw these additional funds at a later date if you want to use the money for something else.

Any extra repayments you make into your redraw reduce the amount you owe on your home loan, which ultimately decreases the amount of interest you’ll pay.

On the other hand, an offset account is a separate transaction account that is linked to your home loan. It’s similar to a standard bank account as you can have your salary deposited into an offset account, and it can come with a debit card for everyday transactions.

Any funds you have in your offset account will be subtracted from your loan’s balance on which interest is charged – in other words, it ‘offsets’ the total balance of your home loan and reduces the amount of interest you’ll need to pay.

Keep in mind that when your mortgage repayments are calculated by your lender, interest is calculated daily and charged monthly. That means the longer you can keep money in your offset account, the less interest you’ll need to pay on your mortgage.

We have an in-depth guide examining redraw vs offset accounts if you want to learn more.

Using a home loan redraw may not be right for everyone – you’ll want to consider your saving and spending habits to ensure you would be using it in the right way. Here are a few aspects to consider when using a redraw facility.

• Where you keep your money: It’s likely that your home loan interest rate is going to be higher than any rate you’ll be able to get with a savings account or term deposit. So, making extra repayments and limiting access to your redraw, or stashing your savings in an offset account could be a savvier way to use your money.
• Can you limit access: Once you withdraw money from your redraw facility, your home loan balance will increase. It’s worth making sure that any redraw you make is put to good use and weighed up against the size of the repayments you’ll need to make going forward and the length of time it might add to paying off the loan.
• Circumstances can change: There have been instances where banks have made changes which have limited or reduced the functions of redraw facilities. While lenders should give their customers plenty of notice, it’s worth reinforcing the point that changes can be made.