Redraw facilities explained
A redraw facility is a feature offered by some mortgage lenders that allows borrowers to withdraw additional payments they've made on their home loan. It provides flexibility by enabling borrowers to access funds they've contributed over and above their required mortgage repayments.
How does a Redraw Facility work?
When you make extra repayments on a mortgage, those funds are typically credited to your loan account, reducing the outstanding balance. With a redraw facility, borrowers have the option to withdraw these extra funds if needed, subject to the terms and conditions set by the lender. The redraw amount is typically limited to the amount of additional repayments made, and there may be minimum and maximum redraw amounts.
For instance, if a borrower has a mortgage with a redraw facility and makes additional repayments totaling $10,000 over the course of a year, those funds would be credited to their loan account. If they later need access to some of those funds for a financial emergency or investment opportunity, they could request redraw some of the funds available.
Benefits of a Redraw Facility
Flexibility: A redraw facility offers borrowers flexibility to access additional funds they've contributed to their home loan, providing a source of finance for unexpected expenses or investment opportunities.
Interest savings: By making extra repayments into the loan account, borrowers can reduce the outstanding balance and potentially save on interest over the life of the loan. The ability to redraw these funds when needed allows borrowers to enjoy the benefits of reducing interest costs while still having access to their money.
Cost-effective: Unlike other forms of credit such as personal loans or credit cards, which often have higher interest rates, redraw facilities typically offer lower interest rates since the funds are part of the mortgage.
Things to consider about Redraw facilities
Redraw fees: Some lenders may charge fees for each redraw transaction, so borrowers should be aware of any associated costs.
Redraw limits: There may be minimum and maximum redraw amounts, as well as restrictions on how often redraws can be made.
Impact on loan term: Withdrawing funds through a redraw facility may extend the loan term or increase future repayments, so borrowers should consider the long-term implications before making redraws.
In summary, a redraw facility can be a valuable feature of a mortgage, offering borrowers the flexibility to access additional funds while still benefiting from potential interest savings. However, borrowers should carefully consider the terms and conditions, fees, and potential impacts on their loan before utilizing a redraw facility.