Last week, we looked at the pros and cons of home loan offset accounts. This week, we’ll look at the pros and cons of another optional home loan feature – redraw facilities. It’s important to understand what a redraw facility is and its pros and cons before you decide whether to get one or not.
What is a redraw facility?
A redraw facility allows you to withdraw any voluntary additional home loan repayments that you make if you need to later on. It’s an option that’s most commonly available with variable rate home loans.
You might get ahead with your repayments by:
- putting your tax refund in to your home loan account once a year,
- making weekly or fortnightly repayments instead of your monthly repayment amount. If you do, you’ll end up making a month’s worth of extra repayments each year. This is best explained by using an example.
Suppose your monthly repayments are $2,400 and you decide to pay $1,200 per fortnight or $600 per week instead. The table below shows you how much you repay each year under each scenario.
|Repayment schedule||Regular repayment amount||Total amount repaid over a year|
What are the pros of a redraw facility?
- It can provide you with quick access to future funds, enhancing your home loan’s flexibility.
- It encourages you to make extra home loan repayments, which can reduce the amount of interest you pay until the funds are redrawn.
- Making additional home loan repayments rather than depositing money in a savings account allows you to reduce your taxable income. That’s because you’ll be saving interest from being charged on your home loan, rather than earning interest. Home loan interest rates are also higher than savings account interest rates, so you’ll save more interest than you would have earned anyway.
What are the cons of a redraw facility?
- Some lenders charge fees for redraw facilities. They may also charge a higher interest rate.
- If you don’t make any additional repayments, you won’t have any additional home loan funds available to redraw. You could therefore be paying a redraw facility and a potentially higher interest rate for no benefit.
- Some lenders may restrict the amount you can withdraw. For example, minimum or maximum amounts during certain time periods.
- It can tempt you into unnecessary spending.
- Any funds you redraw must obviously be paid back. This reduces your chances of paying off your home loan early.
- Some lenders won’t offer them on fixed-rate loans.
What should you look for with a redraw facility?
- Low (or no) redraw fees
- A low accompanying home loan interest rate.
The bottom line
Whether or not you should get a redraw facility depends on your individual financial circumstances. The advantages need to outweigh the disadvantages for a redraw facility to be worth it for you.
How we can help
At Wisebuy Investment Group in Newcastle, our experienced and licensed brokers can help you to get the right home loan for your specific needs. And best of all, our service is free!
Contact us today for an obligation-free chat to find out more. We’d love to hear from you!