Do deposits to my redraw reduce my regular repayments?
Should I use a savings account instead of a redraw?
Not sure how a mortgage redraw facility works or how it's different to an offset account?
If you're researching home loans or you've just signed up for one, you might be wondering how a redraw facility works and what the benefits of having one are. If you're able to make additional payments toward your home loan and need occasional access to cash then a redraw can give you that flexibility.
In this article we'll explore:
A mortgage redraw facility, or redraw account, is a feature typically attached to a variable rate home loan that gives you the ability to make additional payments towards your home loan—and to withdraw those funds at a later date. These can be regular payments over and above your required minimum repayments or a one-off lump sum payment.
A mortgage redraw facility gives you the ability to make additional payments towards your home loan.
The funds in your redraw account work to reduce the balance—or principal—on your loan, which means you pay less interest. This can help you to save money while paying down your loan sooner.
There are some conditions attached to a redraw feature, including that you can only withdraw the funds you have contributed beyond your regular minimum repayments. It's also designed for occasional access, not regular day-to-day use. If you require everyday access you should look into a variable rate home loan with an offset account attached.
Let's look at a simplified real-world example of a redraw account in action.
In terms of how much money you would have access to, let’s assume in this example that you choose to pay an additional $250 per month above the minimum repayments that are required to service your mortgage. This means that after a year you will have $3,000 in your redraw facility ($250 x 12 months) available to use. This amount will also be ‘working’ to reduce your home loan balance.
Another scenario would be if you make a one-off payment of $10,000 into your redraw account. Let’s assume you have a home loan balance of $400,000. This would mean that you would only pay interest on $390,000 ($400,000 - $10,000), as long as that amount is in the account.
To decide if a redraw facility is right for you let's look at the upsides and downsides of this feature.
Opt for a mortgage redraw account and it can help you:
You also need to be aware of the following limitations, or downsides of a redraw facility:
Now let’s look at the difference between a redraw and offset account.
The primary difference between a redraw facility and an offset account is that a redraw is designed for occasional access. By contrast, an offset account is an everyday transactional account linked to your home loan, so it's more flexible for day-to-day use.
They can both help reduce the amount of interest you pay on your home loan, though, which can help you pay off your mortgage sooner, thereby reducing the overall term of your loan.
Let’s now cover a few more common frequently asked questions around redraws.
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