What are the benefits of a redraw facility?

If you’re starting to compare home loan types, you’ll no doubt have come across something called a ‘redraw facility’.’ Many lenders offer a redraw facility, and if you’re in a strong financial position with the ability to pay a little bit more in mortgage payments, this can be a great way to reduce interest payments and potentially shorten the length of your loan.

So, let’s take a closer look at what a redraw facility is, and how it can work for you.

What is a redraw facility?

With a redraw facility, you’ll be able to deposit extra income into your home loan account, above the minimum payments required. The way you do this is completely up to you and depends on your financial situation. For example, you could pay an extra $100 per payment, or make a larger one-off payment if you receive a bonus at work. These extra payments reduce the amount of interest you’ll pay on the loan, as well as possibly reducing the length of time it will take to pay it off.

Those are some of the main benefits of a redraw facility, but what’s really fantastic about this home loan feature is the flexibility it can provide to move money around as required. For example, while many buyers want to deposit extra income into their home loan account, others don’t. This could be due to concerns about sudden changes to their financial situation, which may necessitate access to those funds. This is where redraw facilities really come into their own, allowing for withdrawals of extra income paid into a home loan account.

Withdrawing funds with a redraw facility

Here’s how it works. In home loans with a redraw facility, it’s possible to withdraw extra money paid over and above the minimum payment requirements. This means that if you’ve been paying extra and suddenly find yourself in a situation where that money is required, you’ll be able to take it out and use it. This does negate some of the benefits of paying extra, such as reduced interest and shorter loan life, but the flexibility could be well worth having – just in case.

As part of a redraw facility, some lenders may charge a fee per withdrawal or after a certain number of withdrawals, while other lenders limit the maximum number of withdrawals per year or cap the amount that can be taken out of the home loan account.

Of course, a redraw facility isn’t the only way you can reduce the balance of your home loan with surplus funds. It’s also worth considering an offset account, which you can read about in our recent article comparing these options.