What exactly is a redraw function, how does it work and what should you pay attention to?
Today, most Australian home loan products offer a repayment option – A feature that can help you save on interest and pay off your mortgage faster. So it’s worth familiarizing yourself with how it works.
What is a redraw function?
Redraw function (Noun)
A repayment feature allows you to access any additional payments you have made towards your mortgage.
Paying more than the minimum each month will directly reduce the principal balance you owe, which will reduce the amount of interest you will be charged the following month, and so on and so forth. Most lenders allow borrowers to make additional payments. However, if your loan has a repayment option, you can pay it back if necessary.
See also: Compensation account vs. new payout option
How much could you save with a redraw facility?
Debt consolidation can provide peace of mind for people who are worried about whether they can afford to pay too much on their home loan and benefit from a lower interest bill. Even small overpayments can quickly lead to significant savings on the overall interest bill.
Imagine borrowing $500,000 for 30 years at an interest rate of 5.00% per year.
In this way, regular overpayments can reduce your overall interest bill, as shown in our home loan repayment calculator.
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Could a remortgage facility help you pay off your mortgage faster?
The other big benefit of overpaying on your home loan may be faster repayment of the loan as overpayments are used to pay off the principal.
Going back to the example above, regular overpayments of $100 would pay off the loan in 28 years instead of 30.
If you put an extra $1,000 into the same loan every month, the loan would be paid off in less than 18 years.
Disadvantages of a redraw facility
1. Additional fees and higher tariffs
While using a repayment facility is usually free, some lenders charge borrowers a fee when they withdraw their additional repayments.
It is also worthless that home loans with repayment options may incur higher interest rates and higher fees than those without repayment options. However, these days most mortgages come with a repayment option.
2. Redraw conditions
Unlike offset accounts, accessing the money during a new withdrawal isn’t as simple as swiping your card or transferring it to another account.
You may have to make a redraw request and wait for it to be processed, or there may also be restrictions on how often you can redraw. There may also be restrictions on the minimum and maximum amount that can be withdrawn again.
It’s worth asking your lender if there are any conditions for using their repayment facility.
How to compare home loans with debt consolidation facilities
Because the terms of debt consolidation facilities vary significantly from lender to loan, it is important to understand what is on offer before taking out the loan.
It’s important that you answer these questions before signing on the dotted line:
1. Is there a fee to set up a redraw?
Some loans charge a flat fee for loans that have a repayment option. Sometimes this amount is not charged until the redraw feature is activated.
2. Is there a charge for using Redraw?
Some lenders charge the borrower a fee every time they withdraw funds using the repayment feature. This fee varies significantly between lenders and loans.
3. Is there a maximum number of free redraws per year?
Some debt restructuring facilities give the borrower unlimited free new withdrawals, while other lenders offer a number of free new withdrawals per year.
4. Is there an upper limit to the number of redraws that can be processed?
Some lenders limit the number of times a borrower can claim repayment within a certain period of time – usually a year.
5. Is there a minimum amount you can withdraw again?
Lenders often set a minimum amount that can be withdrawn immediately using a repayment feature. Whether and to what extent these are available determines the actual flexibility of a redraw system.
6. Is there a maximum amount for repayment?
In other cases, a lender may have set a maximum amount that a homeowner can withdraw at once. This can be the total amount of additional repayments less a month’s repayments, or the total value of the additional repayments you have made.
Is a redraw facility right for you?
Although additional repayments and the possibility of repayment offer many benefits, they are likely to only help the right type of borrower. It is important to determine whether a debt consolidation facility suits your financial circumstances and personal approach.
There’s little point in paying for something you won’t use. So if it’s unlikely that you’ll be able to make further repayments on your home loan any time soon, there’s no point in going through the trouble of acquiring a loan redraw feature.
However, for those who can afford to make additional repayments, repayment can help lower your interest bill and potentially pay off the loan more quickly.
Important information and warning about comparison prices
Image by Melissa Walker Horn on Unsplash