What is a home loan redraw facility?
A home loan redraw facility allows you to take out any extra repayments that you’ve made over the required minimum repayments on your home loan.
Any additional repayments you make goes towards your ‘available redraw’ which can be drawn down when required.
Why do I need a redraw facility?
There are several benefits to having a redraw facility on your home loan:
- It gives you easy access to any extra funds you’ve put towards your home loan, to use as you need and to cover for contingencies.
- Any excess funds that you’ve put in your home loan is essentially earning you the same rate charged on your home loan. As interest rates on savings accounts are generally lower than your home loan, you’re effectively earning more.
- You do not pay tax on interest saved. Even though, you’re effectively earning a higher interest rate, you do not pay any tax on it. However, if the same funds were earning interest in your savings account, you would be liable for tax on the interest earned.
- You save on interest on any extra repayments that you’ve made.
How much can you redraw?
Generally, you can access the sum total of all additional repayments you’ve made ahead of your scheduled repayment less one month’s repayment amount.
For example, if you make extra repayments of $200 monthly, after 12 months, you’ll be able to withdraw $2,400 less one month’s repayment.
However, some home loans have a set maximum amount you can redraw irrespective of the additional repayments you’ve made.
How is my redraw balance calculated?
There was a recent change to how redraw balance is calculated to ensure borrowers paid off their loan within the stipulated term of the loan.
The available redraw is now calculated as the difference between your current mortgage balance and the mortgage balance (originally scheduled) if you had not made any additional repayments.
Previously, your minimum repayment would only change if your interest rate did.
Now, if you make additional repayments, your minimum repayment amount will also decrease.
So, if you choose to make reduced repayments and have more disposable income your redraw balance will decrease over time.
COVID-19: Home loan redraw balance decreases
Recently, The Sydney Morning Herald reported that many ME Bank customers contacted the paper “after noticing between 10 and 50 per cent of their redraw funds were absorbed into their home loan without any notification.”
This was a change done by the bank so that the available redraw balance decreases over time so that the customer still pays off their home loan within the original loan term. This change caught many customers off guard since many people use their redraw funds as a rainy day fund or emergency savings.
This change only affected legacy home loan products which resulted in around 4 per cent of customers having their redraw limit reduced.
But they couldn’t have chosen the worst time to do this, especially considering the current COVID-19 crisis. In 2018, Commonwealth Bank also made a similar change.
Following the backlash, they’ve decided to change back home loan redraw limits for any customers who wants it.
Redraw vs Offset: A point of difference
A redraw facility on your home loan is a loan feature, and the ultimate control is up to the bank.
Whereas, offset is a separate transaction account linked to your mortgage account where the bank has no right to freeze or touch the funds.
If you’re relying on your redraw funds as an emergency savings buffer during this crisis, it may be better to transfer those funds to an offset account or your savings account.
Let’s say Lucy has a $500,000 mortgage at an interest rate of 4% p.a. with a 30 year term.
Her minimum monthly (principal and interest) repayment is $2,387.
She makes a lump sum additional repayment of $200,000 in year 10, which reduces her loan amount to $193,920. She makes the reduced new monthly minumum repayment of $1,175.
In year 25, her mortgage balance is $63,808, if she hadn’t made the additional lump sum repayment, her mortgage balance would be $129,616.
The banks will only allow her to redraw the difference – $65,808, far less than the $200,000 she put in originally.
This is because, banks want to stop people re-borrowing (redraw) more than they can reasonably pay back within the original loan term.
As if Lucy is allowed to redraw the original $200,000, her new mortgage balance will be $263,808 with 5 years remaining, that will shoot her monthly repayment to $4,858.
However, if she had kept making her originally scheduled repayment, she would be able to pay off the loan or redraw the full $200,000.
Essentially, if you decide to make the reduced repayments, your redraw balance will decrease over time.
Whereas, if you make the same originally scheduled repayment, you pay off the loan earlier.
How can I access my redraw?
First, you’ll have to activate your redraw facility, to do that, you’ll need to fill in and submit your lender’s ‘Redraw Authority Form’.
Once it’s activated, there are two ways you can access your redraw funds either by:
- Filling in and submitting your lender’s ‘Application to Redraw Payments In Advance’ available on their website or requesting a copy directly.
- Using your lender’s online platform via internet banking or the bank’s Mobile Banking App (Please note that the transfer amount is subjected to your existing online limit).
What is online redraw?
Online redraw works the same way as transferring funds from any other account online via Internet banking or the bank’s Mobile banking app.
With online redraw:
- You can tap into additional repayments 24/7 from the convenience of your computer or phone.
- It gives you easy, same day access to your funds, to use for any purpose at any time.
- The amount you can access is goverened by your existing internet banking limits. If you want to transfer an amount that is higher than your available daily limit, you’ll have to complete their application form.
- A few of our lenders have free unlimited redraws with their online redraw facility.
How does redraw work?
When you have ‘available redraw’, which is the amount by which you’re ahead of your scheduled repayments i.e. the amount you can access, you can:
- Withdraw it in lump sum to buy a car, renovate your property etc.
- Choose to make reduced repayments. Your available redraw will reduce over time if you choose to reduce your monthly repayments.
- Make the same scheduled repayments to pay off the loan faster.
For example, if you have a $400,000 mortgage with a 30 year loan term at an interest rate of say 4.00%, your minimum repayments will be $1,910.
If you make additional repayments of $200 on top our monthly minimum repayments, you’re saving $53,710 in interest and staving off 4 years, 11 months off your home loan term.
At the end of your loan term, both your available redraw and the home loan balance will reduce to zero.
If you’re close to paying off your home loan, we suggest switching to interest-only with say $500 remaining on your home loan.
This will ensure your loan account is not closed off automatically with the last repayment so that you have easy access to equity.
Which home loans don’t have redraw?
When is redraw not available?
Redraw may not be available if:
- You’re in default on the loan contract. Banks will check your home loan statements and account conduct through your repayment history for both existing and repaid debts.
- For whatever reasons, lenders may decide not to allow you to redraw any repayments you’ve made. Ultimately, it falls under the lender’s discretion, this is why an offset account may be a better option in some cases.
What are the disadvantages of a redraw facility?
- There are redraw fees per request.
- It is relatively harder to access than funds in your offset account.
- Your lender can decline your request to access your redraw. It is absolutely based on the lender’s discretion.
What to look for in a redraw?
Not all redraw facilities are the same.
You should consider:
- The fees: Some loans have a flat fee for redraw facilities. It may also have an activation fee and is only charged if and when the borrower activates his redraw facility.
- The available number of free redraws per year: Some redraw facility have a set number of free redraws; exceeding which will incur you redraw fees.
- Fees per redraw: Some home loan redraw facilties may charge you as much as $50 per redraw, whereas others don’t charge anything at all.
- The maximum number of redraws per year: Some will limit the maximum number of redraws that you can make during a period which is usually a year. Once that number is reached you’ll not be able to access your additional repayments.
- Minimum redraw amount: Most lenders have a minimum redraw amount ranging anywhere from $500 to $5,000.
- Maximum redraw amount: They may also have a maximum redraw amount that you can access at any one time or a fixed amount, irrespective of your extra repayments.
Is redraw right for you?
Generally speaking, a home loan redraw facility is an excellent savings tool for borrowers willing to put additional repayments into their home loan.
Please give us a call on 1300 889 743 or fill in our online assessment form today to discuss your needs.