Once you get into the flow of paying your first mortgage, you may want to make a one-off additional payment from time to time when you have the extra cash flow - or even start making regular payments higher than the minimum. This would allow you to pay off your home loan sooner and decrease the amount of interest paid over the life of your loan.
What is a redraw facility?
When you receive a home loan, there is an agreed monthly minimum that you have to pay back.
If you have been paying additional money into your home loan, a redraw facility lets you withdraw the repayments back into your account.
An example of a redraw facility
Jane’s minimum monthly repayment on her home loan is $2000. She has paid an extra $100 a month into her mortgage for a year, which totals to $1200. The redraw facility gives her access to the extra $1200 she deposited in her home loan.
Benefits of redraw
A redraw facility can be a great spot to keep your savings. Instead of earning interest in a savings account, placing extra money into your home loan will reduce the amount of interest of the loan.
Usually, you will save more by placing extra money in a redraw facility instead of your savings account. This is because interest rates on savings accounts are generally lower than your home loan.
Placing extra repayments into your home loan allows you to shorten its duration, however you have the security of taking the extra repayments out if you need.
What is the difference between redraw and offset accounts?
Offset accounts and redraw facilities can be similar in that they both have the potential to save you interest on your home loan and decrease its duration.
However, a redraw facility is likened to a loan feature, while an offset account is a separate transaction account that is linked to your mortgage account. This means that the bank does not have the authority to freeze or touch the funds in your offset account. However, the redraw facility is harder to access and your lender can decline your request to redraw.
Things to consider
Some loans will have a flat fee for the feature of a redraw facility. There also may be an activation fee. Furthermore, some home loan redraw facilities may charge you a fee per redraw.
The number of free redraw fees
A redraw facility may have a set number of free redraws. If you exceed the number of free redraws, you have to pay a redraw fee.
Minimum and maximum redraw amounts
Lenders usually have a minimum and maximum redraw amount - this does take into account your extra payments.
At the end of the day, each home loan has its own features. When choosing a home loan, it’s important to do your due diligence and understand your loan, or speak with a professional. For more information on redraw facilities, contact Wagtail Wealth today.
IMPORTANT NOTE: This information is general advice only and does not take into account your personal circumstances, goals and objectives. Therefore, you should consider its appropriateness for your circumstances before acting on this information.