Redraw facility

What Is a Redraw Facility?

A redraw facility is a feature commonly offered with home loans that allows borrowers to access extra repayments they have made on their mortgage, above their scheduled minimum contributions. Falling under the broader category of mortgage and lending in personal finance, this facility effectively lets homeowners "redraw" or withdraw these additional funds if needed, while still benefiting from the interest savings achieved by having a lower outstanding principal balance. The redraw facility provides a degree of financial flexibility by allowing temporary access to funds that have already been applied to the loan, reducing the overall interest rates charged over the life of the loan.²³,²²

History and Origin

The concept of a redraw facility evolved as financial institutions sought to offer more flexible home loan products to consumers. Traditionally, making extra payments on a mortgage meant those funds were permanently applied to reduce the loan's principal balance and were not easily accessible. However, as financial markets matured and competition increased, lenders introduced features like the redraw facility to provide borrowers with an incentive to make additional repayments by maintaining liquidity. This innovation aligns with broader trends in financial technology and product design aimed at enhancing consumer convenience and utility. The International Monetary Fund (IMF) has noted how digital technologies and financial innovation can improve aspects of lending and provide greater inclusion and flexibility in financial services, suggesting a general push towards more adaptive financial products over time.²¹,²⁰

Key Takeaways

• A redraw facility allows borrowers to withdraw additional payments made on a home loan, above the required minimum.
• These extra payments help reduce the loan's outstanding principal, leading to lower interest charges and potentially a shorter loan term.
• Funds accessed via a redraw facility are typically transferred to a linked transaction account.¹⁹
• It provides a flexible way to manage personal finances, akin to using a savings buffer within the loan itself.
• While convenient, using a redraw facility means those funds are no longer reducing the loan principal, which could negate some interest savings.

Interpreting the Redraw Facility

A redraw facility is interpreted as a dual-purpose tool for managing a home loan. On one hand, it acts as an accelerator for loan repayment: by making additional contributions, the borrower reduces the amount of interest accrued daily, thereby saving money over the life of the loan and potentially paying it off sooner. On the other hand, it functions as a readily available source of emergency funds or for unexpected expenses. The "available redraw" amount typically represents the cumulative sum of these extra payments, less any amounts previously redrawn. Borrowers often use the redraw facility to save on interest by keeping extra funds against their loan, rather than in a separate, lower-interest-earning savings account.¹⁸,¹⁷

Hypothetical Example

Consider a homeowner, Alex, who has a home loan with a redraw facility.

• Original Loan Amount: $400,000
• Original Loan Term: 30 years
• Monthly Repayment: $2,000

Alex receives an unexpected bonus of $10,000 and decides to make an extra lump sum payment to their home loan.

1. Extra Payment: Alex deposits $10,000 into the home loan, bringing the outstanding principal balance down to $390,000 (ignoring regular principal reduction). This immediate reduction means that the interest calculated daily will now be based on a lower principal.
2. Interest Savings: Over time, this $10,000 extra payment directly reduces the amount of interest Alex will pay, shortening the loan term if regular payments continue as scheduled.
3. Redraw Scenario: Six months later, Alex faces an unforeseen car repair bill of $5,000. Instead of taking out a new loan or using a credit report-impacting personal loan, Alex decides to "redraw" $5,000 from the available funds in their home loan.
4. Impact: The loan balance increases back to $395,000 (plus regular principal reduction), and interest will again be calculated on this higher amount. While Alex loses some of the interest-saving benefit from the original $10,000 lump sum, they gained access to necessary funds without incurring new debt. This demonstrates how the redraw facility offers flexibility, allowing borrowers to manage cash flow while still aiming for long-term savings.

Practical Applications

Redraw facilities are primarily found with residential mortgages, particularly those with a variable rate. While some lenders may offer it on fixed-rate loans, it's less common.¹⁶ This feature can be applied in several real-world scenarios:

• Emergency Fund: It serves as a readily accessible pool of funds for unforeseen expenses, such as medical emergencies or car repairs, without needing to apply for new credit.¹⁵
• Debt Consolidation: Borrowers might make extra payments to build up their redraw facility and then use it to pay off higher-interest debts, performing a form of debt consolidation more informally than a traditional refinance.¹⁴
• Home Renovations or Large Purchases: Funds can be redrawn for significant expenses like home improvements or a large investment, leveraging the equity built in the property through additional repayments.
• Tax Optimization (Jurisdiction Dependent): In some regions, how redrawn funds are used can have tax implications, especially if the original loan was for investment purposes. Borrowers should consult with a financial advisor regarding specific tax advice.

The availability and terms of a redraw facility, including minimum redraw amounts or fees, vary by lender.¹³

Limitations and Criticisms

While a redraw facility offers considerable financial flexibility, it's important to understand its limitations and potential drawbacks. One primary criticism is that the ease of access to funds can sometimes lead to overspending, reducing the long-term benefit of paying down the mortgage quicker. If funds are continually redrawn, the intended interest savings are diminished or negated.¹²

Furthermore, the redraw facility is typically offered at the discretion of the lender, meaning they may have the right to limit or stop redraws in certain circumstances.¹¹ This could occur if the loan falls into arrears or if there are significant changes in the borrower's financial standing or market conditions. Tapping into home equity, even through a redraw facility, carries inherent risk management considerations, as the home itself serves as collateral for the loan. Over-reliance on easily accessible funds from a home loan feature could lead to an accumulation of debt if not managed prudently. A report by CBS News highlights various risks associated with tapping into home equity, including the risk of running up too much debt or impacting tax deductions if funds are not used for specific home-related purposes.¹⁰ Economic pressures on families, as discussed by The Century Foundation, can sometimes lead individuals to tap into savings or resort to credit to manage daily costs, which, while not directly about redraw, underscores the broader financial behaviors that might lead to frequent use of such facilities.⁹

Redraw Facility vs. Offset Account

The redraw facility is often confused with an offset account due to their shared goal of reducing the interest paid on a home loan. However, their mechanisms differ significantly.

A redraw facility is a feature within your home loan account. When you make extra repayments, these funds effectively sit against your loan, reducing the outstanding principal balance for interest calculation purposes. If you need the funds, you request a "redraw" from the lender, and the money is transferred to a linked transaction account. The act of redrawing increases your effective loan balance again.⁸,⁷

An offset account, conversely, is a separate, everyday transaction account linked to your home loan. The balance in this separate account is "offset" daily against your outstanding mortgage balance. For example, if you have a $300,000 mortgage and $50,000 in your offset account, you only pay interest on $250,000. The key difference is that the funds in an offset account remain fully accessible as a regular bank account (you can deposit and withdraw freely), while funds in a redraw facility are technically part of your loan repayment and need to be "redrawn." Offset accounts are generally more flexible for daily banking and offer immediate access to funds, whereas redraw facilities may have minimum redraw amounts or processing times.⁶,⁵,⁴

FAQs

Can I redraw from a fixed-rate home loan?

While redraw facilities are more common with variable rate home loans, some lenders do offer this feature on fixed-rate loans. However, the terms may be more restrictive, and there might be limits on how much and how often you can redraw.³

Does redrawing money affect my credit score?

Generally, redrawing funds from an existing redraw facility does not directly impact your credit report or score, as it's not considered a new loan application. You are simply accessing funds that you have already paid into your existing loan.

Are there fees associated with a redraw facility?

Some lenders may charge fees for using a redraw facility, such as a minimum redraw amount or a transaction fee for each withdrawal. It's essential to check the specific terms and conditions with your lender.²

How does a redraw facility help me pay off my loan faster?

By making extra repayments into your redraw facility, you effectively reduce the principal balance on which interest is calculated. This means less interest accrues over time. If you continue to make your regular scheduled repayments without redrawing the extra funds, the loan will be paid off sooner than the original term.¹