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What is a redraw account on a mortgage?

March 23, 2022
by
Craig Gibson

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:

  • How a redraw facility works, with a real-world example.
  • The pros and cons of a redraw account.
  • The difference between a redraw and offset account.
  • FAQ around redraw accounts

What is a redraw account or mortgage redraw facility and how does it work?

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.

Redraw account: real-world examples

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.

The pros and cons of a redraw account

Mortgage redraw account benefits

Opt for a mortgage redraw account and it can help you:

  • Reduce the balance of your home loan, which means you pay less interest. The more money you have in the redraw the more impact it has on the amount of interest you pay, as the extra funds are accounted against your loan total.
  • Have the flexibility to access and use the funds in your redraw account in the future, which could be useful in an emergency or to cover an unforeseen cost.
  • Take a break from making your regular scheduled repayments, provided you have enough in your redraw account to cover these.

Mortgage redraw account downsides

You also need to be aware of the following limitations, or downsides of a redraw facility:

  • It is not designed for regular day-to-day access. If you require this sort of feature, an offset account may be more suitable.
  • Redraw is a feature that is usually only available on variable rate home loans, not fixed-rate products. This means if you switch from a variable home loan to a fixed one you will most likely lose this facility.
  • If you withdraw funds from your redraw account you will be liable for more interest, as the principal or loan balance will increase.

Now let’s look at the difference between a redraw and offset account.

What is 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.


Frequently Asked Questions

Do deposits to my redraw reduce my regular repayments?
Should I use a savings account instead of a redraw?

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