Heard of redraw but not sure what it means? For many homeowners, the concept of a "redraw" is often overlooked, yet it can be a powerful tool that offers a range of benefits.
Once you've gotten into a comfortable routine of paying your mortgage, you might want to take it a step further by increasing your regular repayment above the minimum amount or by making occasional lump sum payments towards your loan. Not only could this help pay off your home loan sooner through reducing the interest charged over the life of the loan, but it also means you can withdraw the extra funds when you need it most.
Firstly, what is Redraw?
If you have a home loan, chances are you might have access to a redraw facility. A redraw facility on your home loan lets you withdraw or ‘redraw’ any extra repayments you've made towards your home loan (on top of your minimum required repayment) to use as you wish.
Essentially, redraw allows you to access the funds already contributed towards your mortgage from these additional ‘over and above’ repayments.
Redraw facilities will usually be offered at the discretion of the lender which means that the lender has the right to stop any redraw of your advance payments in particular circumstances.
Benefits of Redraw
One of the best things about redraw is its ability to provide homeowners with a level of financial flexibility. By being able to access these extra repayments, you could use the funds for a range of purposes such as unexpected expenses, home renovations, holidays, school fees or investments.
2. Saving on interest
Using redraw effectively can lead to substantial savings on interest over the life of a home loan. When you make additional repayments, it reduces the outstanding principal amount, which in turn lowers the interest charged on the remaining balance of the loan so you could potentially pay off your mortgage sooner.
3. Emergency Funds
We’ve all had unexpected expenses pop up from time to time and having a facility like redraw that can act as a ‘safety-net’ in these circumstances which can be extremely valuable. Whether it’s a medical emergency, job loss, or household repairs, being able to tap into extra repayments can provide not only financial relief but can save you the emotional stress.
4. Increase in equity
Redraw can be a strategic tool for wealth creation. By using additional repayments to offset the principal balance, homeowners effectively increase their equity in the property. This can open up opportunities for further investments, such as purchasing additional properties. Redraw essentially enables homeowners to leverage the equity they've built in their property for potential financial growth.
Things to keep in mind - the difference between:
- Redraw versus a savings account:
Redraw can be a smart place to keep savings or extra funds if you have a home loan.
Rather than earning interest like a savings account, you’re reducing the amount of interest on your home loan.
- Redraw versus offset account:
An offset account is linked to your home loan and is used like an everyday bank account. The funds in your account are ‘offset‘ against the balance of your home loan, reducing the interest owing on your loan.
This information provides general advice only. We do not provide advice about this product based on any consideration of your personal objectives, needs or circumstances.