Should I get a home loan with a redraw facility?
Brisbane first home buyers: are you trying to figure out which Brisbane home loan is best for you right now? All these complex terms, tricky jargon, and overwhelming list of options available are a handful to comprehend and sink your teeth into.
However, taking out a home loan with a redraw facility might just help make that decision process much simpler.
In this blog post we’ll be discussing what exactly a redraw facility is, when (and when not) it makes sense to opt for one and how they can ultimately save you money down the line. Let’s get started.
What is a redraw facility?
A redraw facility is a home loan feature that allows borrowers to access any extra payments they have made on their loan. These funds can be used for other purposes, such as purchasing furniture or paying for renovations to their property.
The funds in the redraw facility become available as soon as you make a payment. You don’t have to wait until the end of the loan term in order to access them.
How does it work?
Most lenders offering this service (for both variable rate and fixed rate loans) let’s you track your loan repayments through online or mobile banking services. This feature will display where all other funds have been allocated so far.
This includes any additional repayments made beyond what was required at that time. These contributions are then flagged towards the ‘redraw pool’. It becomes available for withdrawal in times of need or simply as a way to access money quickly — without having to take out an additional loan.
Benefits of a home loan redraw facility
- While other savings accounts often carry some form of interest charges/fees associated with withdrawals/deposits etc., redraw facilities usually come with no additional fees.
- It makes for a great bonus-savings account
- It can offer tax benefits. Placing extra funds in a savings account that pays interest – is added to your yearly taxable income. But any funds are applied directly towards reducing your home loan balance can mean saving interest on a daily basis.
- It helps homeowners get more out of their loan and save money in the long run
Ultimately, if managed correctly, redrawing from home loan can offer enormous benefits for first-home buyers trying to get ahead with their finances.
Redraw facility vs Offset: what’s the difference?
The age-old debate of Redraw vs Offset is an important distinction when shopping around for Brisbane home loans. Let’s break it down and discuss the differences and advantages of each.
Redraw facility
A Redraw Facility is a feature offered on some loan products that allow you to access extra repayments you have made above your minimum repayment amount.
This means you could withdraw that money at a later date for whatever reason (e.g., repairs or emergencies).
Advantages of a redraw facility include:
- usually accessible without penalty as long as they remain within your borrowing limit
- many lenders offer features such as bonus repayments and debt consolidation options with their redraw facility, so you can customise your loan according to your needs.
- eliminates the need to take out a new loan every time you need something important done but don’t have enough saved up yet
- whatever money is made available by redrawing from home loan doesn’t need paid back even after filing taxes
Offset Account
An offset account is not used so much for short-term needs as much as it is for reducing interest payments owed over time. Essentially, instead of earning interest on deposited money (like in an ordinary savings account), these funds are held separately but linked directly to your home loan balance.
When paying off each month’s instalment sum, this ‘offset’ money will be taken into account first; thus decreasing total interest payable.
Advantages of an offset account include:
- interest payments on an offset account are lower than standard loans, as the funds in the account are considered when calculating interest.
- effectively reduces how much interest is paid on the loan.
- lets you adjust payments according to unexpected events (e.g., job loss or medical expenses) without getting penalised for late payment or defaulting entirely
- shaves away at your repayment duration
How to use redraw facility
Below are steps on how to redraw on home loan:
- Make sure your lender offers it as an option on their loan product.
- Consider the fee for having a redraw facility, the fee per redraw, number of free redraws per year, and maximum number of redraws per year
- Find out exactly how much free space there is available for redrawing from each month (this will depend heavily on both who your lender is and the type of product)
- Start putting extra money towards paying off your mortgage early, i.e., making additional monthly payments
- Meet certain conditions as set by your lender (e.g., having been repaying regularly over at least 12 months amongst others)
- Make a request to your lender or bank if you want to withdraw; this should happen seamlessly once all criteria is met
Get a home loan with a redraw facility via the brokers at NBHL
Opting for a home loan with a redraw facility might just be the smartest move you make. By understanding what a redraw facility is and how it can save you money, you can make an informed decision about your home loan.
The brokers at North Brisbane Home Loans are experts in helping first home buyers find the best home loan for their needs. Contact us today to learn more about our services.
Patrick Cranshaw, a Certified Mortgage Professional for over 21 years, founded North Brisbane Home Loans in 2002. His career began with ANZ Bank in New Zealand, where he progressed over 16 years to a Business Banking role in Virginia. After moving to Brisbane in 2000, Patrick led the QLD market for a home loan agency, helped set up the REMAX Real Estate Finance division, and practiced as a broker.
