Getting ahead on your mortgage should be the goal of all homeowners as paying it off early means building wealth and reducing debt. At the same time it’s good to know that you can access any funds you’ve accumulated on top of your minimum commitment should you need them, in the form of a redraw facility.
A redraw facility lets you pay more off your mortgage than the minimum standard fortnightly or monthly repayment while giving you the ability to withdraw the excess repayments at anytime as required. So, if your regular repayment amount is $900 a month and you pay off $1,200 a month, you can access that extra $300 through your redraw facility.
What to check for with a redraw facility
When you take out a home loan, you agree to make a minimum required repayment every month or fortnight for the term of the mortgage. Any additional payments become ‘available redraw’ or readily accessible cash. However, it’s always a good idea to check the terms and conditions of your redraw facility to see what fees and charges, if any, are associated with withdrawals.
A redraw facility can be an effective place for your savings, but instead of earning interest in a savings account, you’re reducing the principal and the amount of interest you pay on your home loan. Some lenders may charge a fee or they may place restrictions on the number of redraws you’re allowed every year.
Unlike an offset account, a redraw facility is not a separate bank account but a feature that sits inside a mortgage. Additionally, while offset accounts offer instant access to your funds, it may still take days to access your funds with a redraw facility. You also should be able to check the balance of your redraw account on your lender’s website or mobile app.
It’s usually easy to redraw the money through online banking, though the minimum and maximum amounts you can withdraw will depend on your lender. At ANZ, for example, there is no minimum amount for eligible home loans, while the maximum amount you can redraw depends on how much extra you’ve repaid off your mortgage.
Before signing up for a mortgage you should make it clear to your lender that you want a redraw facility and/or an offset account. Just be aware that if you switch from a standard variable rate home loan to a fixed-rate mortgage your redraw options will be limited at best.
The Commonwealth Bank, for example, allows for additional payments of up to $10,000 for each year of a fixed-term mortgage without incurring an Early Repayment Adjustment (ERA) and an administrative fee. However, you can only access the available redraw funds at the end of the fixed-rate term.
Remember also that if you choose to redraw money, the outstanding balance will increase, the amount of interest payable will go up and your minimum repayment amount may also rise.
Plenty of benefits
Redraw facilities are beneficial for a number of reasons, including:
- Less interest paid
- Security against future hardship
- Flexibility in managing your finances
- Repayment holidays
- Greater financial freedom
- Improved credit rating
Less interest paid
Any money in your redraw account is subtracted from the balance owing on your mortgage, which means you pay less interest. Put simply, if you commit to paying more than the regular minimum required amount you’ll own your home sooner. With a redraw facility, you only pay interest on the outstanding amount on the mortgage minus the amount in the redraw facility, so if you have a mortgage for $300,000 and $30,000 of redraw equity, you only pay interest on $270,000.
Security from future hardship
A redraw facility provides a buffer against any future financial hardship by allowing you to access your extra repayments. You can then use these funds for emergencies, such as medical issues or car repairs.
Flexibility in managing your finances
Most lenders allow homeowners to make additional one-off lump sum repayments at anytime or to regularly pay more than the minimum required without charging fees, giving you the flexibility to take control of your loan. However, you should always check the fine print when it comes to redraw terms and conditions.
A redraw facility also allows you to take a break (repayment holiday) from upcoming scheduled repayments, if there are sufficient funds in your redraw account. This means you can hold off on repayments for a period – usually between three months and a year – and put the money toward something else you may need at the time.
Greater financial freedom
A redraw facility will provide for greater financial freedom in the future if used wisely as a mechanism for reducing debt and building wealth. As the amount in your redraw facility increases, you can see for yourself exactly how far ahead of your mortgage schedule you are and can set your mortgage repayment goals accordingly.
Improved credit rating
Getting ahead of your mortgage with a redraw facility also demonstrates a big commitment to a large financial endeavour, which will in turn make borrowing money for future investments, especially from the same lender, a lot easier.