Some lenders offer a redraw facility on their home loans. But what is it, how does it work and what is the benefit of having it?
Redraw can be a very valuable tool to help you save in interest, significantly reducing your loan term, whilst still having access to your savings if you need it for other expenses.
Some loans allow you to pay extra into the loan. Redraw is the ability to access those additional payments when and if you need them. The additional funds are paid into the loan itself and while ever they are left there, reduce the balance of the loan that the interest is calculated on. For example, if you have a $400,000 home loan, but have put $50,000 extra towards it, you will only be paying interest on $350,000.
It works in a similar way to an offset account. Whereas an offset account is a separate account to the loan, paying extra and redrawing means that the funds are flowing in and out of the loan account. Some lenders charge an annual fee for loans with offset accounts so if you have a loan with free redraw you can enjoy the same savings but avoid the annual fee. If you are going to put all your spare funds into the loan to maximize the interest savings, redraw needs to be accessed for free. If there is a fee or minimum redraw amount, you may find that the cost and inconvenience may outweigh the benefits.
A redraw facility is a great option for those who like the idea of having an emergency fund. If you find that you often have unexpected bills pop up or you simply like to be prepared with your finances, you may find that contributing extra to your home loan now and using these funds for emergencies may be a better fit for you.
Utilizing redraw may not be advisable for certain situations. These may include if the loan is for an investment property. If you are claiming a tax deduction on the interest on the loan, then any redraw funds will need to be used tax deductible purposes. In this case, your accountant may advise you to put your spare funds in an offset account. If at some stage you may turn the property you live in into an investment property, it may not be advisable either. For anything involving tax and investing always seek advice from a qualified professional.
If you are considering a loan with free redraw, you need to be aware of the terms and conditions the lender has in place. Some factors you will need to research include: if there are fees charged when you redraw, how you redraw (is it via a debit card, online or via branch), what is the number of free redraws per year, as well as the maximum and minimum redraw amounts.
Whether you are looking at a loan with free redraw or an offset account, a State Custodian loan can offer both. Our lending specialists can explain the benefits of each to help you decide which would suit your situation. Just call on 13 72 62 or fill in your details here to have someone contact you.