A common feature in many variable home loans is a redraw facility, and for many borrowers, it can result in big savings over the life of a loan. Here’s why it’s worth considering.
Redraw – the basics
For standard variable home loans, the idea of redraw is easy to understand. Home loans come with a minimum repayment amount per month or fortnight. Redraw means that you can make repayments above the required amount. Depending on individual circumstances, you could add $50 or more to your monthly repayment, or use it when additional cash comes your way, such as a tax return or an inheritance.
Fixed-rate home loans rarely come with a redraw facility, as typically they prevent you from making additional payments.
Save time and money
There are two big advantages to redraw. First, additional repayments will actually save you money in the long run. Paying extra into your account means you reduce the length of your loan. It also means the interest you pay every month is reduced slightly. That’s win-win.
Say your 25-year loan is $600,000 and the interest rate is 3%. If you pay just $50 extra per month, you’ll shave seven months off the loan. More importantly, you’ll save around $6000. That’s money in your pocket, not the bank’s. Make it $100 a month and your overall saving is around $14,000. That’s enough for a pretty nice holiday to reward yourself.
Access to your money
If saving money and paying off your loan sooner isn’t incentive enough, there’s another big benefit to redraw. Unlike loans without a redraw feature, any extra money you pay into your home loan is still available to you. This means that if your financial situation changes and you need access to a bit of cash, or you decide to do a renovation, or go on that holiday a bit early, you can.
If you do access that money, you lose the benefits of saving money and time, but it’s still nice to know it’s there for a rainy day … or a holiday in Bali.
Redraw rules differ from lender to lender. Some have limits on the number of times you can access your money, and some might even charge a fee to redraw your cash. It’s worth considering these rules when you’re considering how often you might use redraw.
And remember that if you redraw money out of your loan, your loan amount will increase, meaning that the interest component of your repayments will increase too.
Talk to your broker
Redraw is popular and common, but – depending on your personal circumstances and ability to save – it might not be for you. If you’re the kind of person who would be tempted to spend available cash, it might not be the best option. Give us a call and we’ll help you decide whether a home loan with redraw is the right option based on your circumstances. At Mortgage Broker Group, our expert brokers will help you find a loan that works for you … and saves you money at the same time.